OPEC+ Meeting Delay Is A Nervous Moment For U.S. Shale Business

The U.S. oil business has bigger potential problems than Joe Biden's promised fracking ban. There is no doubt that the Biden/Harris promise to ban hydraulic fracturing on federal lands and waters would severely hamper the nation's oil and gas business sector.

In addition to curtailing about 20% of U.S. oil production that comes from federal leases, such a move would cause capital flight away from oil projects in the U.S., regardless of land type since it would send a signal that government policy in a Biden administration would present a high degree of risk and uncertainty. This is an outcome an already capital-strapped industry can ill-afford.

But as impactful as that potential problem would be, U.S. oil and gas producers face an even larger looming headache this morning: Uncertainty about the continuation of the OPEC+ agreement, the deal among large oil producing countries to limit output and exports onto the global market. The existence of that agreement currently has its member nations withholding about 7.7 million barrels of crude per day from the market. It is the main reason why the current U.S. benchmark price for West Texas Intermediate, which currently hovers above $45 per barrel, hasn't collapsed back down below the $20/bbl mark.

Reuters reports this morning that the member nations decided late last night to postpone the meeting scheduled for today which was intended to consider extending the current level of production restrictions through the end of the first quarter of 2021. The current level of 7.7 million bopd is scheduled to be reduced to 5.7 million bopd as of January 1. 

Many U.S. shale producers have successfully retooled their operations to become profitable at prices at or above the $40/bbl mark, but few if any could continue to generate profits were prices to again collapse to levels seen during March through May of this year, when the price for WTI even went into negative territory one day in late April. Those producers are dependent on OPEC+ nations to continue artificially withholding their own production from the market in order to avoid a date with bankruptcy court.

Bloomberg is reporting that the ministers have agreed to reschedule Tuesday's planned meeting for this Thursday, December 3. Most member countries, most notably Saudi Arabia, have said that they favor extending the higher level of cuts into 2021. Others, like the United Arab Emirates, Kazakhstan, and reportedly Russia, are eager to raise production levels to take more advantage of the highest prices they have seen in eight months.

Most analysts still believe some form of compromise will be reached. “Some kind of compromise is still very, very likely to be reached,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “The market doesn’t seem to be too worried about the whole thing. And the reason is of course that we are getting increasingly closer to the Covid-19 endgame.”

Bob McNally, president of Rapidan Energy Advisors, said in a Bloomberg television interview, said that he expects the group to agree to a compromise that could consist of a shorter extension with a gradual increase in production levels.

In a note on Monday, Carl Sankey of Sankey Research said that the shale industry Renaissance has arrived, but only if current crude prices can be maintained: "Even at today’s recovered prices, the industry remains and will remain in full-scale recession," Sankyey said, "with job losses having been hidden by PPP and other government programmes. The industry will likely never return to its peak scale in 2019, not because oil prices will not rise again, but because capital discipline, consolidation, and better strategy will characterize the industry of the future."

So, the upstream oil and gas business is better positioned for the future than it was when the Big Bust of 2020 hit in earnest nine months ago, but remains dependent on the OPEC+ deal and its big cuts in supply holding together. With today's scheduled meeting being put off for two days, that future outlook just became a little less certain.