OPEC Refuses to Fear America's Oil Boom When It Clearly Should


Photo credit: Apache Corp.

According to a recent article in Bloomberg, three of OPEC's top producers have again rejected the idea that the organization needs to cut oil production in 2014. The oil ministers from Saudi Arabia, Iraq, and Kuwait last month all noted that increased U.S. oil production wouldn't be enough to overcome production losses in Iran and Libya. In fact, the Saudi oil minister went so far as to say that the reason U.S. benchmark West Texas Intermediate crude has been trading near $100 recently is "because the market is in fear of a shortage of oil and not in fear of oversupply."

Blame Libya
OPEC, which supplies about 40% of the world's oil, agreed in December to keep its output target unchanged at 30 million barrels of oil per day. It sees the market being balanced enough to keep oil prices above $100 per barrel, which is the sweet spot for profits.

One reason for this is that Libyan output has plunged to just 250,000 barrels per day, down from 1.4 million barrels per day in July. Ongoing volatility within the country has caused many of its oil fields, refineries, and ports to close. This affected a number of U.S.-based oil producers as well. For example, both ConocoPhillips and Marathon Oil have seen production issues in the country.

Looking ahead, ConocoPhillips sees its production in Libya averaging about 50,000 barrels of oil equivalent per day. That would actually be a substantial boost, as last quarter the company only saw production of 26,000 barrels of oil equivalent per day from its "other international" regions, which include Libya. Meanwhile, Marathon Oil isn't even including Libya in its 2014 production guidance, though it is planning to invest in its Libyan oil production this year. A comeback in Libyan production in 2014 could put fresh pressure on oil prices and cause more trouble for OPEC.

American production boom continues
OPEC could also face further pressure from America. Thanks to the shale oil boom, America's oil production is expected to increase to 9.6 million barrels per day by 2016. That's a level we haven't seen since 1970. This is happening because oil producers like Apache , ConocoPhillips, and Marathon Oil are all investing billions of dollars to grow production in the U.S.

Over the past year Apache was able to grow its North American liquids production by 35% as it invested heavily in its position in the Permian Basin and Central region. Apache sees the potential for more growth ahead, believing it has the resource potential to grow its proved reserves fourfold in the years to come.

It's a similar story at ConocoPhillips. The company is spending 55% of its $16.7 billion capital budget in North America this year. What's more, 90% of its near-term development capital will be spent to grow production in North America.

Marathon Oil also is focusing its efforts in America. The company is accelerating drilling activity in the U.S. -- boosting its rig count in the Eagle Ford and Bakken by 20% while doubling activity in the Oklahoma Woodford in 2014. That should yield annual production growth of more than 25% through 2017.

Investor takeaway
OPEC might not fear American oil production, but that doesn't mean it's not worried. The fact that some of its oil ministers downplay the shale boom, saying that the market is big enough for everyone, might actually suggest they do lose sleep at night knowing that America's oil boom could cut into its profits. Given the amount of money American producers are pumping into the shale boom, OPEC should start worrying.

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