Oil: Are Saudis Or U.S. Frackers the Swing Producer?

From Barron's Emerging Markets Daily:

The advent of fracking — forcing stranded oil and gas from deep below the earth, with chemicals, sand, pellets and pressure — means the U.S. has contributed mightily to the global glut of oil.

But has the U.S. replaced Saudi Arabia as the new swing producer? It is certainly a swing factor in oil prices today: after the International Energy Agency said U.S. shale oil production could fall by 600,000 barrels per day this year and decline 200,000 barrels in 2017, the U.S. price of oil was up nearly 7% to $31.69 per barrel, and the international Brent benchmark was up more than 5% to $34.80. Shares of Brazil’s state-controlled Petroleo Brasileiro or Petrobras (PBR) are up nearly 15%, and shares of China oil producer CNOOC (CEO) are up 5%. The thinly-traded iShares MSCI Saudi Arabia Capped exchange-traded fund (KSA) is up 4%, while the Global X MSCI Nigeria ETF (NGE) is down 2.2% and the iShares MSCI Emerging Markets ETF (EEM) is up more than 2%.

The IEA projects the U.S. will be producing 14.2 million barrels per day of oil by 2021, while Iran could be producing Iranian 3.9 million barrels per day. But the agency added that it doesn’t expect “a major increase in production capacity” in Iran or Iraq by 2021, but warned that “there is hardly any spare production capacity other than in Saudi Arabia and Iran, and significant investment is required just to maintain existing production.” The conclusion: the IEA says that “global oil supply growth is plunging as an extended period of low prices takes its toll.”

Here’s Roth Capital Partners John M. White, a longtime energy analyst, who explains why the Saudis have an advantage:

“From a reservoir and operations standpoint, we believe Saudi is much more favorably positioned to be the world’s swing producer. Saudi has slightly in excess of 10 million barrels per day of (b/d) current production. And five million b/d of that production is from one field, Ghawar. Saudi production is from natural reservoir rocks, mainly sandstones and limestones, with a good portion on relatively flat decline curves. And also a good portion of Saudi production is still flowing under natural pressure … The recent surge in U.S. crude oil production has been almost entirely from shale rocks [and production] decline curves on shale wells are very steep, upwards of a 60% decline rate during the first 12 months …MORE