Surging oil drilling in Texas could cause Summer power shortages

Oil prices were stable on Friday, supported by expected supply cuts from Opec but held back by record US production. US West Texas Intermediate (WTI) crude oil futures were at $56.5/ per barrel at 0132 GMT, up 12 cents from their last settlement.

Brent crude oil futures were up 7 cents at $66.69 a barrel. Prices were mainly supported by expectations the Organization of the Petroleum Exporting Countries (Opec) would start withholding supply soon, fearing a renewed rout such as in 2014 when prices crashed under the weight of oversupply.

The amount of surplus electricity, or reserve margin, in the state is forecast to shrink to 8.1% of expected demand, according to a report Tuesday from the Electric Reliability Council of Texas Inc.

“ERCOT’s ability to meet Texans’ growing power needs through the record-setting summer of 2018 was supported by the actions taken by power suppliers and consumers,” CEO Bill Magness said in a statement.

“The main oil price benchmarks Brent and WTI are both light-sweet crudes and reflect this glut,” the US bank said. “Opec production cuts are usually implemented by removing medium and heavier barrels from the market but that does not address the oversupply of light-sweet.”

Due to the structural oversupply that has emerged in the market from record production by many countries, Morgan Stanley said that “Opec cuts are inherently temporary (because) all they can do is shift production from one period to another”.

While Opec considers withholding supply, US crude oil production reached another record last week, at 11.7 million barrels per day (bpd), according to US Energy Information Administration (EIA) data published on Thursday. US output has surged by almost a quarter since the start of the year.

The record output meant US crude oil stocks posted the biggest weekly build in nearly two years. Crude inventories soared 10.3 million barrels in the week to Nov. 9 to 442.1 million barrels, the highest level since early December 2017.

This surge contributed to oil prices falling by around a quarter since early October, taking many by surprise. “Oil bulls, us included, have capitulated and we no longer see oil climbing to $95 per barrel next year,” Bank of America Merrill Lynch said in a note.

While sentiment has turned bearish, some analysts warn that 2019 could be tighter than expected. “We expect 2019 oil demand to reach 101.1 million bpd,” natural resources research and investment firm Goehring & Rozencwajg said, up from just under 100 million bpd this year.

Add Opec’s expected supply cuts, and Goehring & Rozencwajg said “those investors who are able to adopt a contrarian stance and stomach the volatility are being presented with an excellent investment opportunity” to buy into oil after the recent slump.

Bank of America agreed, saying “we believe oil is oversold and will likely bounce up from the current levels, as Opec+ dials back production in December”. However, Morgan Stanley warned a cut by the Middle East dominated producer cartel may not have the desired effect.

Oil and gas development in West Texas is boosting peak demand of electricity in the region by 8% annually through 2023, compared with just 2% statewide, the grid operator said.

Drilling booms have come and gone in this oil town for nearly a century. But the frenzy gripping it now is different. Overwhelming. Drilling rigs tower over suburban backyards. There’s a housing crunch so severe that rents are up 30 percent in the last year alone.

Tax-averse city officials raised fees this spring just to keep basic services afloat. This boom is engulfing the rest of West Texas, too, extending to areas that drilling hasn’t touched before.

As communities welcome the jobs and the new business, they’re struggling with an onslaught of problems that include spikes in traffic accidents and homelessness. At the same time, the firm said production outside North America was set to disappoint.

What’s happening is unprecedented. In December, companies in the Permian Basin an ancient, oil-rich seabed that spans West Texas and southeastern New Mexico were producing twice as much oil as they had four years earlier, during the last boom. Forecasters expect production to double again by 2023.

Texas Gov. Greg Abbott and others say the drilling spree is ushering in a new era of American energy independence, but American demand isn’t driving it. Foreign demand is. In late 2015, Congress cut a deal to lift 40 year old restrictions on the export of crude oil.

That opened the floodgates. The U.S. sold 230 million more barrels of crude to other countries in the first half of this year than it did three years earlier a surge made possible by a virtually identical spike in Permian production.

The U.S. just surpassed Russia as the world’s top oil producer. The International Energy Agency predicts that American oil most of it from the Permian will account for 80 percent of the growth in global supply over the next seven years.

That’s bringing big profits to oil companies as well as lung-searing pollution to places where drilling has skyrocketed, while threatening to exacerbate climate change.

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