Resilience of US shale has surprised oil market, says ADIA economist

The tremendous resilience shown by US shale players has surprised the oil market, according to the head of research of Abu Dhabi’s sovereign wealth fund.

Speaking at the Gulf Intelligence Energy Markets Forum in Fujairah, UAE, Christof Ruhl, head of research at Abu Dhabi Investment Authority (ADIA), noted: “As oil prices started declining in the face of incremental supplies, it was only rational for OPEC not to cut production [in order to maintain market share]. However, shale has shown tremendous resilience, and neither US nor Canadian production has suffered to the extent market forecasters thought it would.”

Technology had been a great equalizer, the veteran economist added.

“Despite, the North American rig count falling, technological improvements have exceeded expectations to keep production steady if not in a state of constant increase. We notice that shale oil is different from conventional oil. In a classic sense, it is not subject to a 7 to 10 year response [for better or worse] to investment increases or capital expenditure reduction that conventional oil plays remain susceptible to."

In effect, Ruhl noted there were two cycles in the oil market. “You have the conventional story, where the effects of capex cuts, including recent divestment, would only be felt 7 to 10 years from now, and then you have unconventional shale where the response to ramping production up or down would be quicker and short-run focussed."

Ruhl, who joined ADIA from BP in May 2014, predicted in 2012 that the boom in US shale gas and unconventional oil would make North America almost totally self-sufficient in energy within 20 years, a theory that is holding up despite the current volatility. "That's because shale oil supply is simply more elastic and responsive to prevalent market conditions,” he explained.

The ADIA economist also noted that supply disruption was by and large getting offset by supply increases. “So, it was inevitable that oil prices were going to tail-off.”

Ruhl said OPEC was right to adopt its current stance of attempting to hold its market share. "However, its response from here is among the biggest uncertainties the market faces. Nigeria, and Venezuela even more so, need the price to rise and would always vote for a headline production cut by OPEC members. However, paradoxically given their dire finances when times are desperate - in sheer economic terms they can do little more than pump as much oil as they can in order to monetise it."