US weekly oil and gas rig count falls by the most since February this year

US energy firms cut the most oil and natural gas rigs in a week since February this year, energy services firm Baker Hughes Co. said in its closely followed report on Friday.

The oil and gas rig count, an early indicator of future output, fell by seven to 748 in the week to May 05, 2023.

Despite this week's rig decline, Baker Hughes said the total count was still up 43 rigs, or 6%, over the same period last year.

Oil rigs fell by three to 588 this week, in their biggest weekly decline since March. Gas rigs fell by four to 157, their biggest weekly decline since February.

US oil futures were down about 11% so far this year after gaining about 7% in 2022. US gas futures plunged about 52% so far this year after rising about 20% last year.

That drop in gas prices helped cause the number of rigs active in the Haynesville basin in Arkansas, Louisiana and Texas, the nation's third biggest shale gas field, to fall this week to 62, the lowest since March 2022, according to Baker Hughes.

US oil and gas production grew rapidly in the first two months of 2023 – a delayed response to the high prices and upturn in drilling that characterized much of last year following Russia’s invasion of Ukraine.

But growth is set to decelerate sharply as the more recent slump in prices curtails new drilling and well completions, with the impact evident by the fourth quarter of 2023.

This week, Chesapeake Energy Corp, EOG Resources and APA Corp said they could delay some well completions or ramp down drilling due to weak prices.

Shale producer Diamondback Energy noted rig prices are falling and steel costs are set to decline by about US$20 to US$25 per foot, a sign the inflationary pressures that plagued the oilfield in the past year are easing.

 

 

OPEC Plus still controls oil supply

The surprise oil output cuts announced on Sunday by OPEC plus members illustrate their greater power over the market, given limited supply growth by other producers such as US shale firms and still-growing demand despite the energy transition.

Oil has jumped to US$85 a barrel since members of the Organization of the Petroleum Exporting Countries and allies including Russia announced production cuts of about 1.16 million barrels per day (bpd), adding to curbs already in place.

While OPEC or OPEC Plus decisions to cut output in the past have drawn warnings that higher prices and lower OPEC Plus output would encourage US shale producers to pump more, officials have not voiced such concerns recently.

Goldman Sachs said it sees elevated OPEC pricing power - the ability to raise prices without significantly hurting its demand - as the key economic driver, and estimates the production cut will raise OPEC  Plus revenues.

"One thing is for certain, OPEC is in control and driving price and US shale is no longer viewed as the marginal producer," said James Mick, senior portfolio manager at Tortoise Capital Advisors.

"OPEC wants and needs a higher price, and they are back in the driver's seat to obtaining their wishes."

US shale oil drillers over the last two decades helped to turn the United States into the world's largest producer. But the gains in output are slowing and executives warn of future declines.

US oil and gas activity stalled in the first quarter, according to a survey, with some respondents citing higher costs and interest rates. OPEC has this year been lowering its US shale oil output forecast, having also done so in 2022.

An OPEC Plus source, asked if OPEC Plus is in the driver's seat when it comes to the oil market now said, "We are not in the passenger seat".

OPEC+ does not have a target for oil prices. The Saudi Arabian energy ministry said the voluntary output cut from the kingdom, the kingpin of OPEC Plus, was a precautionary measure aimed at supporting oil market stability.

OPEC sources have cited a lack of sufficient investment to increase supply as likely to support prices this year.

Investment is rebounding after taking a hit during the pandemic. According to the International Energy Forum (IEF), oil and gas upstream capital spending rose 39% in 2022 to US$499 billion, the highest level since 2014 and the largest ever year-on-year gain.

But, the IEF said, annual upstream investment will need to increase to US$640 billion in 2030 to ensure adequate supplies.

OPEC is pumping almost 1 million bpd less than its current output target, according to its own figures and other estimates, with notable shortfalls in Nigeria and Angola from which Western oil companies have moved away in recent years.

While non-OPEC producers are still expected to pump more in 2023, the forecast of a supply increase of 1.44 million bpd falls short of expected world demand growth of 2.32 million bpd, according to OPEC forecasts.

The International Energy Agency, which represents 31 countries including top consumer the United States, also expects demand growth to exceed supply growth, although to a smaller extent than OPEC.

In OPEC's view, investment cuts after oil prices collapsed in 2015-2016 due to oversupply; along with a growing focus by investors on economic, social and governance (ESG) issues - such as tackling climate change - have led to a shortfall in the spending needed to meet demand.

OPEC Secretary General Haitham Al Ghais, in comments to Reuters last year, attributed slower shale growth to factors including an increase in investor caution and the impact of ESG issues on the industry.

"The scope for supply growth outside of OPEC+ members is limited and in combination with tighter conditions expected later this year even before this cut was announced, there is now greater upside risk to prices," said Callum Macpherson, head of commodities at Investec.

 

Weaker shale oil production forecast for 2023

The shale oil patch this week closes the door on a disappointing year while bracing for weaker output gains in 2023, hamstrung by rising costs, dwindling reserves and pressures to hold down spending.

The US oil production is anticipated to rise by an average of 620,000 barrels per day, according to the latest government estimates, a third less than the roughly one million bpd some forecasts called for at the start of the year. That shortfall has undercut shale's influence on global markets and helped lift prices for the second year in a row.

Gains in 2023 year will be harder to come by, said Scott Sheffield, Chief Executive Officer of top Permian producer Pioneer Natural Resources. He predicted 300,000 bpd to 400,000 bpd of increased shale production in 2023.

"Most companies are drilling tier two and tier three inventories now," having tapped their best prospects, Sheffield said in an interview. "Less quality production is coming out of the Permian, out of the Bakken," he said, referring to the top two US shale basins.

Weakening output gains come despite historically strong demand in the wake of Russia's invasion of Ukraine. Brent futures on Friday December 30, 2022 settled at US$85.91 per barrel, a level that typically would spur producers to pursue higher prices with drilling increases. For the year, Brent is up about 10%, after jumping 50% in 2021.

Sheffield predicts global crude to average about US$90 per barrel in 2023, with a potential upside of about US$120, higher than current levels.

A more optimistic production view from energy technology firm Enverus - which forecasts an about 500,000 bpd increase next year - is still below this year's tepid level.

"These headwinds are expected to persist," said Chetan Sharma, a senior associate with Enverus who cited supply chain constraints and uncertainty over what the OPEC cartel will do.

Denver-based Civitas Resources, Colorado's largest producer, said the regulatory environment also has made it difficult for companies to ramp up production quickly.

"If we want to increase significantly as an industry, we would need to shorten permit cycle times," said CEO Chris Doyle, pointing to an 18-month lead-time for a new drilling permit.

Civitas grew volume about 4% year-over-year and anticipates relatively flat production in the coming year as it prioritizes free cash flow and balance sheet strength over growth.

Pioneer and other shale producers are experimenting with oil recovery techniques that could eventually squeeze more oil out of older wells. The maturing of shale fields became a bigger problem for industry growth year 2023.

In the near-term, Sheffield warned oilfield inflation, which ran around 10% to 15% this year, will persist and limit production growth. Another restraint is investor demands to focus on returns over volume increases.

Pioneer and other oil firms are no longer contracting with drillers or fracking firms to have new equipment built because of the financial demands.

"We're not doing that this year because they would charge another 30% to 40% more, and we don't know what is going to happen in three or four years, by the time we've made that investment," Sheffield said.

 

 

 

OPEC plus likely to stick to planned March output increase

OPEC plus is likely to stick with a planned increase in its oil output target for March 2022 when it meets on Wednesday next week. Several sources from the producer group said, as it sees demand recovering despite downside risks from the pandemic and looming interest rate rises.

While two OPEC plus sources said oil at a seven-year high close to US$90 a barrel might prompt the group to consider further steps, the vast majority of sources said no new decision was expected at the February 02, 2022 online meeting.

One Russian source told Reuters the country was concerned the price rally might revive a boom in US shale production.

"OPEC plus countries should be on high alert with this price level given the bullish forecasts for shale oil production in 2022," the source said.

The source added that high oil prices were also hurting profit margins of Russian refineries.

OPEC plus, which groups the Organization of the Petroleum Exporting Countries (OPEC), Russia and other allies, has raised its output target each month since August by 400,000 barrels per day (bpd) as it unwinds record production cuts made in 2020.

Current plans would see OPEC plus do so again in March.

"We are very likely to go for another 400,000 barrels per day," one of the OPEC+ sources said. "There are no reasons against it."

OPEC plus has resisted pressure from the United States since last year to raise supplies more quickly.

Despite its increased targets, actual output from OPEC plus has not kept pace as some members struggle with capacity constraints, and this has been a factor underpinning prices.

OPEC plus missed its production target by 790,000 bpd in December 2021 as members such as Nigeria and Angola struggled to raise output, the International Energy Agency said.

Several banks and analysts including Morgan Stanley and JP Morgan, expect oil prices to top US$100/barrel later in the year 2022 amid tight OPEC plus spare capacity and strong demand.

Some OPEC plus sources believe that the recent price rally is driven more by geopolitical tensions than fundamentals.

"With Russian-Ukrainian tension one could expect that, but [it is] not a supply issue for sure," one of the sources said about prospects for US$100 oil.

US drillers add most oil and gas rigs in a week since April 2020

The US energy firms added the most oil and natural gas rigs in a week since April 2020 as rising oil prices prompt more drillers to return to the wellpad. The oil and gas rig count, an early indicator of future output, rose by 13 to 601 in the week ended on January 14, 2022, the highest since April 2020, energy services firm Baker Hughes Co. said in its closely followed report on Friday.

U.S. oil rigs rose 11 to 492 this week, their highest since April 2020, while gas rigs rose two to 109, their highest since March 2020.

The Eagle Ford in South Texas gained six rigs this week, the most of any basin, bringing its total to 50; it is highest since April 2020. The Haynesville shale in Texas, Louisiana and Arkansas gained three to 52; it is highest since November 2019.

The US crude futures were trading around US$84 per barrel on Friday, putting the contract on track to rise for a fourth week in a row for the first time since October.

With oil prices up about 12% so far this year after soaring 55% in 2021, a growing number of exploration and production (E&P) firms plan to enhance spending for a second consecutive year in 2022.

The rig count has climbed gradually for a record 17 months in a row, but US oil production slipped in 2021 as many energy firms focused more on returning money to investors rather than boosting output.

The US oil output was hit by the coronavirus pandemic which crushed demand and prices, and is only forecast to surpass 2019's record levels of 12.3 million barrels per day (bpd) next year. The government projects production will rise from 11.2 million bpd in 2021 to 11.8 million bpd in 2022 and 12.4 million bpd in 2023.

Rig activity across the five largest US oil plays would need to increase by about 13 weekly over next eight weeks to reach a sustainable plateau to hold current oil volumes in 2022, versus average rig gains of about two over the last four weeks, Mizuho said this week.

"We continue to believe drilling activity will be a put a ceiling on US supply growth, which is positive for the commodity and large cap E&Ps," the bank said.

 

 

50 million barrels crude oil to be released from Strategic Petroleum Reserve

The Department of Energy will release 50 million barrels of oil from the nation's Strategic Petroleum Reserve, the White House announced Tuesday, as the Biden administration seeks ways to control rising costs at the pump.

Of the 50 million barrels, 32 million will eventually be returned to the strategic reserve over the years ahead once fuel prices come down in a bid to ensure the reserve remains stocked, officials said. 

Another 18 million barrels will be released as an acceleration of an oil sale Congress had already authorized.

Tuesday's announcement was made in concert with China, India, Japan, South Korea and the United Kingdom, which will also tap into their own strategic reserves.

The Biden administration had reportedly discussed the strategic reserve option in recent weeks to increase supply as consumers faced higher gas prices amid broader concerns about inflation as the economy rebounds from the coronavirus pandemic.

The Labor Department earlier this month released statistics showing consumer prices grew far faster than expected in October and that annual inflation had hit a 30-year high.

The consumer price index, which tracks inflation for a range of staple goods and services, rose 0.9 percent last month and 6.2 percent in the 12-month period ending in October. The rise in prices was driven largely by a 4.8 percent increase in energy costs for the month, including a 1.6 percent increase in gasoline prices.

In a bid to rein in gas prices as inflation contributed to sinking poll numbers, Biden last week asked the head of the Federal Trade Commission to investigate whether oil companies are illegally increasing prices.

Sen. John Barrasso (R-Wyo.), the ranking member of the Senate Energy and Natural Resources Committee, said on Tuesday that Biden's own policies were to blame for needing to tap into the strategic reserve.

“We are experiencing higher prices because the administration and Democrats in Congress are waging a war on American energy," Barrasso said in a statement, arguing Tuesday's announcement would not fix the problem alone.

"Begging OPEC and Russia to increase production and now using the Strategic Petroleum Reserve are desperate attempts to address a Biden-caused disaster," Barrasso added. "They’re not substitutes for American energy production."

Congress is negotiating a roughly $2 trillion reconciliation package that is the cornerstone of Biden's agenda and features billions of dollars in investments in programs to combat climate change, with investments in renewable energy, electric cars and more.

The White House insisted Tuesday's announcement was not at odds with Biden's goals to shift away from fossil fuels in the years to come.

"Today’s announcement reflects the President’s commitment to do everything in his power to bring down costs for the American people and continue our strong economic recovery," the White House said in a statement.

"At the same time, the Administration remains committed to the President’s ambitious clean energy goals, as reflected in the historic Bipartisan Infrastructure Law signed last week and the House-passed Build Back Better Act that together represent the largest investment in combating climate change in American history and is a critical step towards reaching a net-zero emissions economy by 2050 and reducing our dependence on foreign fossil fuels."

US accuses OPEC Plus jeopardizing global economic recovery

The White House has said OPEC Plus is risking imperiling the global economic recovery by refusing to speed up oil production increases and warned the United States was prepared to use "all tools" necessary to lower fuel prices.

The move came after Saudi Arabia-led Opec and its allies such as Russia rejected US calls to help tame rising oil prices, insisting they would stick with a plan of only gradually increasing output, even as demand roars back from the depths of the pandemic.

"Opec+ seems unwilling to use the capacity and power it has now at this critical moment of global recovery for countries around the world," said a spokesperson for Biden's National Security Council.

"Our view is that the global recovery should not be imperilled by a mismatch between supply and demand."

Oil prices are close to seven-year highs despite economic activity not yet fully recovering to pre-pandemic levels and higher energy costs stoking concerns about inflation. Brent crude oil prices slipped about 2 per cent after the meeting towards $80 a barrel.

US President Joe Biden has blamed Russian and Saudi oil supply restraint for a surge in US petrol prices, which have risen 60 per cent in the past 12 months.

Jennifer Granholm, the US energy secretary, told the Financial Times last month that a release of oil from the country's strategic stockpiles was among "tools" the Biden administration could deploy to cool crude prices that have more than doubled in the past year.

Saudi Arabia defended its stance on Thursday saying the producer group was acting as a "responsible regulator" by only gradually increasing oil output by 400,000 barrels a day (bpd) each month.

"What we have seen over the past few months again and again and again is that energy markets must be regulated otherwise things will go astray," Prince Abdulaziz bin Salman, Saudi energy minister, said in an extended press conference.

The group sought to present a united front to the US, with energy ministers from Mexico to the UAE lining up to support the decision.

Opec+ said in a statement it wanted to "provide clarity to the market at times when other parts of the energy complex outside the boundaries of oil markets are experiencing extreme volatility and instability".

Abdulaziz repeatedly referenced gas and coal markets, the prices of which have risen faster than oil this year, to justify the group's actions but the explanation failed to satisfy the White House.

Saudi Arabia has long been one of Washington's most important Middle Eastern allies but tensions are increasing with the Biden Administration.

Biden has refused to speak with Crown Prince Mohammed bin Salman, the heir to King Salman and day-to-day ruler of the country. The US released a declassified intelligence report in March that said the Crown Prince authorised the murder of Washington Post journalist Jamal Khashoggi.

Abdulaziz is the half brother of the Crown Prince and is seen as frustrated by the push by western countries to cut their reliance on fossil fuels while also asking the kingdom to raise oil production.

"The relationship between Saudi Arabia and the US is at risk of being strained as the latter is going full-bore to tackle climate change," said Christyan Malek, head of oil and gas research at JPMorgan.

"But Saudi Arabia in this context needs to fund its own energy transition. And it's looking for an oil price and a relationship which is conducive for that."

The White House has also said it is monitoring Russia's actions in natural gas markets, as prices in Europe and Asia have soared fivefold this year. Some lawmakers in Europe and the US have blamed Moscow for exacerbating the gas price surge by restricting supplies to Western Europe.

Bob McNally, head of Rapidan Energy Group and a former adviser to the George W Bush White House, said the decision by Opec+ could prompt a response from consumer countries.

"Given the complete rebuff by Opec+ and President Biden's clear threats to respond, odds of a US if not an International Energy Agency strategic stock release are rising fast along with other retaliatory options," he said.

Under the current plan, Opec+ will add 400,000 bpd every month until the end of 2022, restoring oil supply removed last year after the US cajoled Saudi Arabia and Russia to make record deep cuts to prop up an industry devastated by the pandemic.

West getting ready again to create rift between Saudi Arab and Iran

Major oil producers are scheduled to meet in Kuwait to deliberate on the outcome of their collective cut in production. It is expected that they won’t make any decisions until May, but are likely discuss the slow pace of market adjustment.

A survey of 13 oil market analysts by Bloomberg concludes that OPEC has little choice but to continue their production cuts. “They’ll probably think they need to grin and bear it longer. The glue that bound them together to begin with, which was higher prices, is the glue that will continue to bind them together.”

A point to be dealt with by all is ‘Saudi Arabia might demand Iran cutback if OPEC is to extend deal’. Speculation about whether or not OPEC will extend its production cut deal for another six months will be one of the most significant variables affecting oil prices in the short run. Western media has once again started spreading disinformation, “Saudi Arabia might only agree to an extension if Iran agrees to cut its production, something that it did not have to do as part of the initial deal”.

 The western media is prompting, “Iran agreed to a cap on production slightly higher than its October baseline for the January to June period, but Saudi Arabia is growing tired of taking on the bulk of the sacrifice for the market adjustment and might stipulate that other countries make a larger sacrifice if the deal is to be extended through the end of the year”.  

The western pinch can be understood by a Reuters report quoting a Saudi energy ministry official that crude exports to the United States in March would fall by around 300,000 barrels per day (bpd) from February and hold at those levels for the next few months.

The official said the expected drop, in line with OPEC's agreement, could help draw down inventories in the United States that stood at a record 533 million barrels last week. It is also believed that Saudi exports to other regions, notably Asia, will not face any cut, rather these may increase. Therefore, the western media is once again making hue and cry that unless OPEC extends the curbs beyond June or makes bigger cuts, oil prices are not likely to improve.

The question remains whether OPEC, whose committee monitoring the cuts will meet over the weekend in Kuwait, will extend the deal? In Russia, private oil producers are ditching their skepticism and lining up behind an extension of output cuts after previous oil price increases compensated for lost income.

In the United States, shale drilling has pushed up oil production by more than 8 percent since mid-2016 to just above 9.1 million bpd, though producers have left a record number of wells unfinished in Permian, the largest oilfield in the country, a sign that output may not rise as swiftly as drilling activity would indicate.

While, I am not an expert to suggest any thing to OPEC, I have no option to tell them that if no cap is put on oil output in the United States, they (OPEC) have no obligation to cut output.  On the contrary they should start dumping their oil in the United States, rather than giving it a chance to increase indigenous production. OPEC must once again let the price go down below US$25 per barrel.  This will render the producers from the United States uneconomical. OPEC should also stop considering Iran its enemy as it (Iran) can’t increase output in near term.

US shale producers to gulp Saudi market share of oil

After OPEC lead by Saudi Arabia and Russia arrived at a consensus to contain oil production, I wrote that the real threat for Saudi Arabia was not Iran but the US shale producers. Some of my critics said that I suffer from US-phobia and try to portray whatever happens on the earth as part of US conspiracy.

This morning when I read a news from Reuters about increasing number of rig counts in the US, it gave me a feeling that I was not mislead by the western media but right in saying that with the hike in crude oil price, rig count in the US would jump dramatically.

According to the Baker Hughes, US energy companies have added oil rigs for an eighth week in a row as crude oil prices rose to a 17-month high. During the week ended 23^rd December 2016 the total rig count went up to 523, the most since December 2015.

The report also said that by May this year rig count had plunged to 316, from a record high of 1,609 in October 2014. This decline could be attributed to crude oil price that plunged to US$26/barrel in February 2016 from US$107/barrel in June 2014.

The report also indicated that oil and gas rigs count would average above 500 in 2016, around 750 in 2017 and above 900 in 2018. This confirms the news that while other oil producing countries curtailed fresh investment, US shale producers continued production without filing bankruptcy under Chapter 11.

The Reuters news should be an eye opener for oil producing countries, particularly Saudi Arabia, Iran and Iraq. They should not be the first to cut production and let the crude oil price go up. If they want to keep US shale producers under pressure, they will have to keep crude oil price below US$35/barrel. This may be pains taking but the only option to bring down the number of active rigs in the US. They should also keep an eye on E&P companies filing bankruptcy under Chapter 11.

In response to this I have received following response from Mark S. Christian, ​President, Chris Well Consulting.

I read your article, "US Shale Producers to Gulp Saudi Market Share of Oil". This article implies a skyrocketing North American rig count, but the U.S. did not add 523 rigs during the week ending December 23, 2016. In fact, the rig count in the U.S. is growing only modestly at the moment. Last week the U.S. added only 16 rigs in total - 13 rigs exploring for oil, and 3 rigs exploring for natural gas. This brings the total rig count to 523, but your article implied 523 rigs were added during this past week, and that is not correct. Maybe it was an editorial mistake by the publisher - which said: "During the week ended December 23, 2016 the total rig count went up by 523, the most since December 2015".It should have said ..."the total rig count went up to 523", implying the aggregate total reached this number.

I have been in the well-servicing business for more than 30 years and during this time operated workover rigs.​ A well service company provides well completion and maintenance services and​ demand for rigs go up and down with the oil price. When the oil price recently fell below $30USD/Bbl - my​ workover rigs were sitting idle. Oil companies could not afford to work on their wells, so they let them go offline. As prices moved above $45/Bbl, oil companies started calling again - and our workover rigs slowly began moving back into the field. The same holds true for American drilling rigs. Higher prices = higher U.S. rig utilization.

This supports your hypothesis that - 1) the U.S. rig count is a threat to the Saudi-led production cuts and 2) American shale may be a longer term threat to OPEC's market position.  Your warning to Iraq, Iran, and Saudi that raising prices via production cuts is not in their long-term interest, is correct, although I surely hope they do not change course.

Saudi guided OPEC into underestimating the staying power of shale-focused oil companies in the United States who were built on junk bonds and high-interest debt. Most were developing fields that were not economic below $60/bbl - and the Saudi's knew this. Riyadh miscalculated by expecting these financially weak companies to fold up quickly once prices fell below lifting costs. That did not happen, many went into Chapter 11 bankruptcy which allowed them to discharge their bond debt and emerge with a cleaner balance sheet.

El Naimi expected very steep decline curves for U.S. shale production, however, this did not materialize and North American shale production turned out to be more resilient than even the American oil companies forecasted. El Naimi also expected the shale market to collapse on itself as he viewed U.S. shale production to be inefficient. It was - until market forces went to work and held the unconventional resource market together much longer than the Kingdom's cash reserves or El Naimi's ideas were able to bear. 

In November 2014, the bottom fell out of the US oil market and caused U.S. service costs to deflate - my rig rates fell 30% in 60 days. What most outside the U.S. don't understand about the American market is when things are good we can ramp up drilling and well completion quickly​, but when things turn bad - cost cutting and a lazer-focus on efficiency enable us to sacrifice profits and survive until the market rebounds.

El Naimi's low-price strategy forced American E&P's to cut wasteful spending and exercise more discipline over their profit and loss. This helped​ U.S. production become more efficient - and lowered U.S. lifting costs. Now fields that were unprofitable when crude prices fell below $60/bbl are profitable at $45/bbl.

The big question that everyone wants to know, (and relate directly to your warnings to OPEC in your recent article) is: How long will it take the​ U.S. to ramp up production enough to offset OPEC's production cuts? Can American production actually grow large enough to begin driving global oil prices down? If that happens, OPEC will no longer be the swing producer we have relied on for so many years to correct bubbles in the market.

If the U.S adds 16 rigs per week over the next 52 weeks - the resulting increase of 832 new rigs in the next year will not affect America's oil production to an extent it will make a noticeable change to the global oil market. Over the years I have noticed that the U.S. market needs 2-3 years of booming exploration and development activity before the global market takes notice. I do agree with your assumption that production growth in the U.S. may swallow up Saudi's recent production cuts, but it will take 24-36 months before many people take notice.

Can oil prices continue upward trend?

One of the questions haunting exploration and production (E&P) companies is how soon and how much oil prices will go up by end of this year? Te reply is simple, hike in price is dependent on how much output producers are willing to relinquish.

Therefore the first point to explore is who will take the lead in cutting down output first.

The western media is still keeping the hype that Saudi Arabia has to cut its output but the biggest stumbling blocks are Iran and Iraq. It continues to spread disinformation that since Saudi Arabia and Iran continue to be the worst foes, any reduction in output by Saudi Arabia remains a remote possibility.

According to a Reuters report, "Oil rose to a one-year high on optimism regarding a future agreement between OPEC and major producers to restrict output"

It also said, "Significant doubts whether they (production cut targets) will actually be fulfilled due to the rivalry between OPEC members, who are fighting aggressively for global markets share, could prevent an effective deal.”

As per report, Goldman Sachs said in a note to clients on Tuesday that despite a production cut becoming a "greater possibility", markets were unlikely to rebalance in 2017. The rationale was, "Higher production from Libya, Nigeria and Iraq is reducing the odds of such a deal rebalancing the oil market in 2017 and even if OPEC producers and Russia implemented strict cuts, higher prices would allow U.S. shale drillers to raise output.

Initially, I had a point of view that most of the shale oil producers were unable to continue production below US$50 barrel due to accumulated losses. Now, believe that they have withstood the test, which is evident from the persistent increase in tnumber of active rigs. However, the number of operating rigs is still less than 25% of total installed rigs.

Moral of the story is that shale oil producers are more anxiously awaiting hike in price but out of desperation they want to increase the number of operating rigs and snatch Saudi share as early as possible. They have invested billions of dollars hoping that oil price would not fall below US$50/barrel. The crash that began in 2014 has shattered their dreams. Even geopolitical turmoil in MENA has failed in deterring OPEC members, mostly located in the region where proxy wars have been going on for more than last two years.

Why analysts are talking about declining oil prices only?

Somewhere I read a story about the energy giants ‘seven sisters’ which virtually control the global economy. All analysts are talking about declining earnings of these companies but not about the benefits of low oil prices. The same is also true about Pakistan where analysts are too worried about earnings of less than half a dozen oil & gas exploration companies but hardly demand the government to stop persistent hike in taxes on petroleum products.

A few months back I raised a question in one of my blogs, who are the beneficiaries of declining oil prices? At that time my own inference was that the US is the biggest beneficiary, being the largest consumer of energy products. After lapse of a few months I still withstand my point of view. I even go to the extent of saying that not only all other oil producing countries are plunging into serious financial crisis but Saudi Arabia and Russia are worst hit. Lower oil prices may keep proceeds from oil export low for Iran but it may gain the most after easing of sanction it had endured for more than three decades. Its non-oil exports are likely to increase substantially and it may also succeed in attracting enormous foreign direct investment in virtually every sector. 

Declining oil prices have enabled the US in increasing its strategic reserves, oil imports remain high and indigenous oil production still hovers at record high levels, above 9.2 million barrels a day. Reportedly the US crude inventories have surpassed the 500 million barrels milestone. Two of the global benchmarks WTI and Brent bounced up and down throughout the week ended on 5th February. However, faltering global economies offer a chance to the US Fed not to hike the interest rate, resulting in weak dollar and pushing oil price higher again. 

The western media is now trying to create an impression that the collapse in oil prices is now bleeding over into the broader global economy. They talk about the ongoing down turn in oil exporting countries, from Saudi Arabia to Russia, Venezuela, Iraq, Nigeria, and more. They have strange rationalization that cheap energy should bolster consumption, but the drop in commodity prices has been so sharp that questions continue to arise about the creditworthiness of some oil producers, Venezuela tops the list. With billions of dollars in debt due this year a rapidly shrinking ability to deal with the crisis, a debt default may not be too far off.

Citigroup added its voice to those concerned about the health of the global economy, citing four interlinked forces – a strong U.S. dollar, low commodity prices, weak trade, and soft growth in emerging markets – for the sudden fragility and potential for a global recession. "It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks," Citigroup analysts warned.

ConocoPhillips (NYSE: COP) made news this week when it became the first US-based oil major to slash its dividend. Italian oil giant Eni (NYSE: E) was the only other oil major to have done so – it cut its dividend almost a year ago. ConocoPhillips cut its dividend by 65 percent this week, and the company’s CEO argued that the move would save $4.4 billion in 2016.

The oil majors are having trouble covering spending and also their shareholder payouts with their underlying cash flow. By and large, they are making up for the shortfall with new debt. Chevron took on an additional $9.6 billion in debt to cover dividend obligations, ExxonMobil added $10.8 billion in fresh debt, and BP took on another $4.6 billion. At some point, something has to give. S&P downgraded a long list of oil companies this week, including Chevron and Shell. It also put BP and ExxonMobil on review for a possible downgrade.

A quick rundown of the full-year earnings from some of the oil majors:

•    BP (NYSE: BP) lost $6.5 billion in 2015, one of the company’s worst on record.
•    ConocoPhillips (NYSE: COP) posted a loss of $4.4 billion in 2015.
•    ExxonMobil (NYSE: XOM) saw profits halve to $16.2 billion.
•    Royal Dutch Shell (NYSE: RDS.A) posted a profit of $3.8 billion, down 80 percent from 2014.
•    Chevron (NYSE: CVX) reported a loss of $588 million, its first loss since 2002.

Winners and losers of oil war

The US and Saudi Arabia will never accept that they are entwined in an apparent oil war. While Saudi Arabia keeps on producing oil at record level to maintain its share in the global markets, its earnings are plunging. Despite decline in price the shale oil production has not seen any significant reduction, although number of active rigs have declined to blow 600 from above 1,600.

On the face it appears that the US and Saudi Arabia are fighting ‘price war’, the perception is negated because both the countries connived to take the price above USS147/barrel. They are still supporting each other to punish Russia and Iran.

Oil from many countries is being pilfered by ISIS, which is being bought by those who claim to be fighting a war with the most brutal outfit, drawing strength from selling pilfered oil. In a way Kurds also don’t have the ownership of oil which they are exporting from Iraq.

Countries called P5+1 agreed with Iran to remove sanctions, but the restrictions still continue. Iran has borne the brunt most, because its oil related revenue has nearly halved and it is not yet clear when will it get the chance to boost oil exports.

Initially, Saudi Arabia was not willing to curtail daily production by OPEC members, but now it is talking about containing production provided Russia and other non-OPEC members also agree to curtail output.

With winter approaching fast, consumption of heating oil and gas is expected to rise but stockpiles are still hovering at record levels.

It may be true that all eyed are fixed on 4^th December meeting of oil cartel but little is expected to change. The three giants, the US, Saudi Arabia and Russia are not likely to change their stance.

The credible signs of improvement in the US economy are missing, Chinese economy is still faltering and IMF has already curtailed rate of global economic growth.

One point is clear that oil demand is not likely to grow significantly in the near future. Therefore, the only option available to oil producing countries is to curtail production. Many analysts are of the view that December 4 will come and go but the glut will continue.

Let no one forget that the biggest beneficiary of declining oil prices are OECD, are they ready to take a hit? The reply is a loud NO!