There is an interesting convergence in views by the global agencies that track oil supply and demand suggesting that US oil production is finally trending down in two of the biggest onshore tight oil plays at Bakken and Eagle Ford while global oil demand seems to be creeping up. The question is will this leveling off of US oil production growth be enough to bring world oil prices to more sustainable higher levels?
US EIA started it in its Annual Energy Outlook forecasting total US crude-oil production would be down by 57,000 barrels per day in May 2015. In Paris the IEA told markets to expect flattening. And even OPEC projected U.S. oil would peak at 13.65 million barrels a day in the second quarter of 2015 and then trend down in the second half of the year.
While OPEC has complained that the growth in oil production outside of OPEC was the cause of the glut, Reuters reported the cartel itself increased production levels 810,000 barrels a day above its own self-imposed targets of 30 million barrels a day compared to 29.3 million barrels a day of expected demand for OPEC oil in 2015. This suggests that OPEC itself is responsible for about 1.5 million barrels a day or 54% of the estimated 2.78 million barrels a day in excess oil supply for the first half of 2015.
‘The US shale revolution has clearly been a game changer nearly doubling US oil production since 2008 and turning the US into the world’s largest producer of oil and natural gas. As you can imagine, this terrifies OPEC and other competing producing regions. Why?
Since 2008 total US oil and gas production has gone up 11 quads (quadrillion British thermal units) compared to Russian growth of 3 quads and Saudi Arabia production of 4 quads. Fear that the US shale revolution would contagiously spread around the world combined with the stark economic reality for the Saudi’s that if they cut production to bring oil prices back up (as they have traditionally done) others would simply take Saudi market share. Enough—-was the Saudi conclusion.’
So Saudi-lead OPEC refused to reduce production levels in order to prop up oil prices. In a meeting of OPEC members in November 2014, the Saudi’s said they were not prepared to lose market share by cutting their own production while others both inside and outside of OPEC kept producing more and more oil creating a glut.
Since then many have pointed fingers in this game of oil supply and demand chicken. The Saudi’s blame the growth in US onshore production from tight oil—the shale revolution—for the glut, but Russia and other OPEC and non-OPEC members heavily dependent upon oil revenues for their budget have produced as if their lives depended upon it—which it does thus we have a world oil glut of more supply than demand given current economic conditions of weakening demand in China, EU and even the US.
In fairness, without action by some market participant to reduce supply in response to weak demand the situation could be worse that today’s oil prices less than half the peak price in mid-2014. No one wanted to see $10 oil prices. The Saudi’s deserve credit for taking action, but blaming the US is a lot easier for the largest OPEC member than blaming other OPEC members for cheating yet again. The tough love OPEC action of holding production levels at their 30 million barrels per day punishes OPEC members for cheating, punishing Russia for its duplicity, and starving Iran for its unconstructive rivalry as it seeks regional dominance in the Middle East.
This Saudi action is a solid triple hit, but it is not a home run and there will not likely be many runs batted in to pad the score when this game finally ends. The Saudi’s did what they had to do in their own self-interest. They are furious at the Obama administration over its mishandling of Syria and Iran and the EU is similarly feckless. The Saudi’s need but do not trust Turkey and they worry that both Russia and China are not going to help the Saudi’s achieve their own strategic interests.
The signals are getting stronger that the game of oil price chicken is running its course and likely will fade away as prices slowly rise to reflect slowly declining supply and flat demand by the end of 2015. Why?
- Because the Saudi’s made their point about loss of market share and asserted ‘adult supervision’ of the market.
- Because low oil prices also cost the Kingdom big money.
- Because low oil prices hit OPEC members hard and some, like Venezuela and Ecuador are on budget life support.
China’s economy is still slowing, the BRICs are broke, Russia is an angry bear starved for oil honey, and the US shale revolution has slowed down—-but if the Saudi really thought their policy would scuttle the onshore revolution in America they failed.
US production was sheltered by hedging and able to wind down drilling activity and rigs in an orderly way. But US shale producers also cut costs and their break-even points making their ability to cycle back up as prices rise along with demand. And because the Saudi’s undermined the shale revolution elsewhere in the world it is time to declare victory even if it means that the US is still the best game in the world for access to reserves, to advanced technology, and to competitive advantage with lower break-evens for the future.
By Gary Hunt from Tech & Creative Labs LLC