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Industry observer sees US shale oil 'calling the shots' in the long-term market

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Industry observer sees US shale oil 'calling the shots' in the long-term market

American unconventional oil production has become so powerful that it has become the dominant long-term force in the global marketplace, Tudor Pickering Holt & Co. managing director Michael Bradley said May 23.

Speaking at the AIPN International Petroleum Conference in Houston, Bradley said geopolitical matters will dominate the market in the short term, with the U.S. confrontation with Iran and the upheaval in Venezuela being at the top of the list.

"For oil markets over the next 12 to 18 months, [geopolitics] will be the only thing that matters," Bradley said. The lifting of the export ban on crude, he said, allows for the U.S. to operate its foreign policy from a position of strength, but the market remains difficult to gauge.

"There's a lot of concern with the China trade battle, so a lot of people don't want to participate in the market," Bradley said. "Hedge funds have been scorched by [price] volatility, so they're just not there."

OPEC, on the other hand, may keep prices from falling far in the near term. Bradley said most observers believe the cartel has no interest in producing extra oil over the next several months, content instead to see prices stay in the current range of $60 per barrel or higher.

Over the medium term, Bradley said, there are concerns about the impact of electric vehicles on demand and questions about the rate of production growth from U.S. shale plays. The player with the largest impact in prices over the next couple of years, however, could be U.S. President Donald Trump as he attempts to use sanctions as a weapon to win trade battles before the 2020 election.

"He's fighting an economic war with China, an economic war with Venezuela and an economic war with Iran. It's unprecedented, and he can do this because American oil production is so high," Bradley said. While the markets are adjusting to the idea that the U.S. will continue to pressure Iran, Bradley said they are "really discounting" the idea of war.

Exports from Venezuela are also expected to have little sway on the market for some time, even if the regime of Nicholas Maduro is eventually forced out. Corruption and a lack of maintenance have left the nation's oil industry in shambles.

"What would it take to get back to 2 million barrels per day? We think $50 [billion] to $75 billion over the next 10 years will be needed to get back there," Bradley said.

That leaves American shale "calling the shots" in the long term. The investor uprising against American producers for their lack of shareholder returns is forcing changes to how business is done, which could prevent U.S. companies from flooding the market.

"It's returns, or lack of returns. Companies have been chasing shale, overloading balance sheets and not delivering returns. Big shareholders are getting involved and are forcing companies at the board level to go after returns, and that's a good thing," Bradley explained.