- June 5, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
It is unlikely that OPEC will cut production at its June 5, 2015 meeting in Vienna. Assuming no cut, oil prices should continue the descent that began in early May (Figure 1). Prices may fall into the $50+ per barrel range since there is no tangible reason for their rise from January’s $46 low.
Figure 1. Brent crude oil spot price May 1- June 1, 2015: Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
It is remotely possible that OPEC may decide to cut production because many members are strapped for cash but I suspect that Saudi Arabia’s longer view of demand and market share will dominate the decision and that there will be no cut.
World oil production has undergone a structural shift from supply dominated by relatively inexpensive conventional production to increasingly more supply coming from expensive deep-water and unconventional production. Most conventional oil will be increasingly focused in the Arabian, Siberian and North Caspian basins (Figure 2) while deep-water and unconventional production is focused along the margins of the Atlantic Ocean and in North America.
Figure 2. Location map showing Arabian, Siberian and North Caspian sedimentary basins. Source: USGS.
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This shift is at the root of the current price conflict between OPEC and North American oil producers. Since 2008, OPEC liquids production has been fairly flat until mid-2014 (Figure 3). Non-OPEC production outside of North America has been flat. Most production growth has occurred in the U.S. and Canada but it is not only from tight oil.
Figure 3. World liquids production since 2008 showing OPEC, non-OPEC minus the U.S. and Canada, and the U.S. and Canada. Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)
The competition for OPEC market share is from Canadian oil sands, Gulf of Mexico deep-water and tight oil production. U.S. plus Canadian production has increased 6.2 million barrels per day (mmbpd) since January 2008. OPEC production has increased 2 mmbpd over that period with 1.3 mmbpd (65%) of that increase since June 2014.
Lower oil prices over the past year (Figure 4) have not resulted yet in any observable decrease in North American production. Higher prices over the last few months further complicate the situation for OPEC. The global production surplus has gotten worse, not better, in recent months but prices rose based on sentiment.
Figure 4. Crude oil prices since June 2014. Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)
It is true that U.S. production may be falling but a 3-month lag in reporting prevents us from seeing this. It is also true that OPEC may have limited capacity to increase their production further although Middle East rig counts have never been higher.
The only way for OPEC to significantly increase its market share is to undermine North American expensive oil production with low oil prices for at least another 6 months. Unless short-term interests carry the day at OPEC’s meeting on Friday, a production cut at this time makes little sense to them.
If we focus attention on U.S. gasoline consumption at 9mmbpd everything makes sense. This consumer bloc is by far the largest in the world, equal to total oil consumption of ALL Western EU members combined! This amounts to 400 gallons per year for each of 310 million Americans.
Increasing numbers of Americans cannot afford $5000 per year for a family of four leaving less and less for other discretionary spending, therefore, demand is destructed and price falls, all leading to a resurgence in travel and a hastening toward the end of the oil age.
John,
You have summarized nicely the case for price cycling that I discussed in my Dallas Geological Society presentation that is posted on this website.
The idea that resource scarcity produces cycles that include very low prices is hard for many to understand and is difficult to document. Of course, most people do not believe that oil is becoming scarce so perhaps we are talking to the wrong audience!
Thanks for your comment,
Art
Art, how long until all the capex cuts in investment and
Cancellations of projects will start to show up in supply deficit?
Shell bought bg assuming Brent would recover to $90 by 2018?
Do you agree?
David,
When you talk about a supply deficit, the U.S. currently has a 7.373 million bopd supply deficit that translates into imports.
I assume that you mean, When will U.S. production begin to fall? The simple answer is, I don’t know.
The oil price increase since January has complicated what should have been a sharp decrease in tight oil production. $60 per barrel oil prices give producers some latitude to complete wells that are already drilled and improved price has attracted investment capital that apparently believes that prices will continue to rise.
EIA announcements that oil production is increasing are estimates but indicate that oil production continues to increase and is currently 9.586 million bopd. This is partly because deep-water Tertiary Jack-St. Malo Field has begun production with 170,000 bopd initial capacity. Drilling Info data for February says that Bakken and Eagle Ford production is down but Permian is up (see my post).
Shell’s bet on $90 oil by 2018 is probably reasonable in my view although EIA does not forecast that Brent will exceed $90 until 2025 and some OPEC forecasts are much more pessimistic suggesting mid-$70 prices into the 2020s.
The real underlying issue is the global economy and demand for products in general. That demand has been weak since 2008 and central banks have been fairly ineffective in stimulating it. The increase in U.S. vehicle miles travelled since the oil price collapse is an interesting test case for gasoline demand. VMT has increased impressively but it is unclear how much gasoline consumption is increasing. Allen Brooks has summarized the issue nicely in his recent edition of Musings From the Oil Patch.
All the best,
Art