US shale to remain key factor in shaping market outcomes

US shale will remain a key factor shaping market outcomes, as in previous cycles, according to the latest analysis by Bassam Fattouh and Andreas Economou of the Oxford Institute for Energy Studies (OIES).

The US shale response was sharp and fast during the COVID-19 pandemic and despite recent improvement in prices, output was still lower by 1.4mn b/d at the of end 2020 compared to a year earlier, they report. A key feature of the current cycle is the longer lags between the price, rig count and US shale output. These longer lags, among other factors, imply that US shale will not disrupt oil balances in 2021, and output is forecast to contract by 380,000 b/d year-on-year. However, in early 2022 the picture becomes more uncertain with US shale production projected to grow by 0.95mn b/d year-on-year, but with the bands widening around OEIS estimates. While impressive, the recovery is uneven across shale plays and by the end of 2022, production is expected to still be below the 2019 peak.

Despite the sharp rise in COVID cases in India and elsewhere, confronted by the gradual unwinding of the OPEC+ output cuts in May/July 2021, oil prices appear well bounded in the $60/b and $70/b range throughout 2021 and 2022, according to Fattouh and Economou. In the very near-term, risks to the outlook are balanced, but market uncertainties persist beyond 2021 pertaining to the supply side. The global demand recovery is moving at two speeds, with the rebound in the OECD and China gaining traction, while other non-OECD are trying to cope with renewed COVID waves, severe delays in vaccinations and the deeper economic impacts of the pandemic. Near-term supply is expected to increase gradually, with OPEC+ leading the rise. Despite recent headwinds, market deficits persist but the extent of the global oil demand rebound in the second half of the year will shape market outcomes in 2021 and beyond.