As OPEC meets on July 1, continued growth in US production may paradoxically no longer be the threat it once was for the producer group. Until recently, US light tight oil, commonly referred to as shale oil, had been a major challenge — even arguably an existential threat — for OPEC. Far from going away, shale’s relentless growth shows no sign of abating, as Kayrros realtime monitoring of well completions reveals. On its face, this could keep frustrating the group’s efforts to curb supply. But as US production keeps rising, the way shale interacts with the broader oil market is changing. Shale is no longer simply displacing oil imports into the US, it is now directly or indirectly competing with OPEC barrels on international markets. While this could be an added concern for OPEC, it also makes WTI, the main US benchmark, more exposed to international developments, including OPEC policies.
Recent price movements seem to signal the coming of age of WTI as an international benchmark
Recent price movements seem to signal the coming of age of WTI as an international benchmark. This would be good news for OPEC. Reversing earlier declines, oil prices have started firming up on geopolitical risk in the Gulf — and none have firmed up more than those of US WTI, a marker whose prices in the past had often seemed disconnected from international markets and more driven by domestic factors than global ones. (US coastal benchmark LLS did not track, but LLS was less disconnected from Brent to begin with.)
Oil prices across the board spiked after an attack on tankers in the Gulf in mid-June, retraced their gains, then rose again a week later following Iran’s downing of a US drone and stayed there. Most Middle East oil flows to Asia and to a lesser extent Europe, and is thus priced off Brent and Dubai benchmarks rather than WTI. Yet Kayrros analysis shows WTI proved more responsive to the events than Brent. Brent-WTI spreads tightened and backwardation in WTI futures widened but narrowed in Brent.
The internationalization of WTI makes sense given the trend in US exports
The internationalization of WTI makes sense given the trend in US exports. The combination of US supply growth and sanctions policy has effectively turned the US into a world supplier to be reckoned with. Production growth increasingly pushes US shale oil into export markets, while new logistical links extend its reach by connecting shale basins with coastal export terminals. US sanctions aimed at Iran and Venezuela have also helped by effectively making room in international markets for US barrels. US crude exports surged by 800 kb/d since January 2019, even as those from Iran and Venezuela combined have dropped by upwards of 1 MMb/d.
US sanctions are also starting to have more bite. Kayrros satellite monitoring shows that Iran and Venezuela in recent months were surprisingly good at circumventing sanctions and managed to ship more oil abroad than they are generally given credit for. Since the end of sanction waivers in May, however, Iran seems to be having a harder time keeping oil revenue going. While Iranian tanker loadings have continued unabated in the last two months, how effective Tehran will be at finding a home for these cargoes remains to be seen. Several Iranian oil customers have switched part of their crude slate to US oil or said they would do so.
Even as its production and exports continue to grow, however, the US is not about to replace Saudi Arabia as swing supplier — also good news for OPEC. While supply growth from the US effectively competes — despite obvious differences in crude quality — with OPEC barrels, the US has no spare production capacity. Shale oil is short-cycle and has relatively low initial capital requirements, making it potentially more price elastic than conventional barrels, let alone so-called unconventional oil with long lead times and high capex.
There is a limit to this price sensitivity, though. Kayrros measurements of well completions in the Permian and other shale plays debunk the widely shared but erroneous view that shale producers sit on large inventories of drilled and uncompleted wells that are just waiting to be brought online. Saudi Arabia and its allies remain the sole holders of effective spare production capacity, giving them unparalleled leverage over supply and prices.
While there is no lack of challenges ahead for OPEC, continued US production growth may no longer be at the top of the list
While there is no lack of challenges ahead for OPEC, continued US production growth may no longer be at the top of the list. US exports are finally accomplishing what OPEC had long set out to do but could not deliver on its own: bring down US crude stocks. Reversing earlier builds, the US EIA last week reported an eye-popping, 12.8-million-barrel plunge in US crude stocks in a single week, including — as correctly measured by Kayrros five days ahead — a 1.7‑million-barrel draw at Cushing, Oklahoma. Shale’s growing access to international markets means that US oil stocks are more likely to draw in response to OPEC supply cuts or demand for precautionary storage elsewhere than they have in the past.
To be sure, OPEC has other headaches, not least a demand slowdown after five years of record growth. But as US oil extends its international reach, WTI price signals are bound to more closely reflect global fundamentals, including changes in OPEC supply, than had previously been the case. Shifting interactions between the US and global markets will also make it ever more critical for market participants to keep close tabs on developments in both shale basins and international markets — both areas where Kayrros technologies bring exceptional realtime insights.