US Shale: Two Viewpoints from Morgan Stanley and IEA

A discussion point on US shale is what will US shale producers do next? US shale producers have over-produced in the past, helping to drive down oil prices. But what might happen in the future?


Two recent reports have different viewpoints: Morgan Stanley and IEA.

My viewpoint is that shale producers are being asked by investors to provide a better return on their money. Therefore, my argument is that shale producers will grow output inline with increasing demand. Sure, they could overproduce and drive down prices, but that might not make their investors very happy.

Morgan Stanley

Via CNBC, it appears that Morgan Stanley agrees with my point of view:

Drillers may be reluctant to dive deeper into the red to fund growth at a time when investors are asking for financial discipline.

There are some very interesting points/facts in the article:

1. There is very little supply growth outside of OPEC and the US. This seems in line with the argument that the world might be hit with an oil shock sometime after 2020.

2. There is the belief that OPEC and Russia will extend their 1.8 million barrels a day reduction deal through 2018.

3. US shale has a labor problem, which is putting a cap on oil production.

4. If OPEC and Russia extend their agreement and it became dependent on US shale to keep the market balanced, we'd need to see production grow:

from about 5.9 million barrels a day this year to 7 million barrels a day in 2018 . . . That would require drillers to start standing up 8 to 10 new rigs each month . . .

Point 4 is something to keep an eye on: if new rigs don't increase by 8 to 10 a month, prices will head higher. If we do see that increase, prices should hold steady or decline.

IEA (International Energy Agency)

On the other side of the argument is the IEA.

Per their World Energy Outlook 2017,

The US shale revolution turns to exports. A remarkable ability to unlock new resources cost-effectively pushes combined United States oil and gas output to a level 50% higher than any other country has ever managed; already a net exporter of gas, the US becomes a net exporter of oil in the late 2020s.

Admittedly, the IEA article doesn't really state their expectations for US shale production in 2018; however, it does state that US shale will continue to grow. So perhaps not a total contradiction of what Morgan Stanley is saying as Morgan Stanley's report is focused on 2018.

Though there does appear to be a disagreement on the fundamentals of US shale: Morgan Stanley believes that a lack of labor is a major problem for US shale growth; IEA believes that US shale will find cost-effective ways to increase production.

Like the CNBC article, the IEA has some interesting points about oil.

1. Oil demand will keep rising until at least 2040.

2. The US will account for "80% of the increase in global oil supply to 2025 . . . "

3. At that point, US production will start to decline and the world will once again be tied to the Middle East oil production.

4. 2017 marks the third year of low investments, which could imply an oil price spike in the 2020s.