- July 10, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
The news from the IEA is not good.
“World oil demand growth appears to have peaked in 1Q15 at 1.8 mb/d and will continue to ease throughout the rest of this year and into next as temporary support fades.”
I don’t have great faith in forecasts but the data shows declining demand growth from late 2010 to the 2nd quarter of this year (Figure 1).
Figure 1. Year-over-year demand growth, 2010-2015. Source: IEA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
The weak global economy is the cause of low demand growth. The current debt crisis Greece and collapsing stock markets in China are the latest alarm signals.
Today, the IMF lowered its world economic growth outlook because of these problems.
“We have entered a period of low growth.”
—IMF chief economist Olivier Blanchard
IEA data shows that world liquids production increased 1.1 mmbpd compared with the 1st quarter of 2015, and demand fell by 410 kbpd (Figure 2). Half of the production increase occurred in June 2015.
Figure 2. IEA quarterly liquids supply and demand.Source: IEA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
The production surplus (supply minus demand) that is responsible for low oil prices continues to increase (Figure 3).
Figure 3. World liquids production surplus or deficit. Source: IEA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Brent crude oil price has fallen from $65 in late June to approximately $58 today.
Current events in Greece and China, and a possible deal with Iran occur against the backdrop of a growing world oil-production surplus. This surplus consists of two components: over-production and weakening demand growth. Of the two, over-production is the easier problem to solve.
Unconventional production has not declined meaningfully so far and OPEC seems determined to maintain or increase its production. The standoff will be resolved by lower price. Clearly the few months of lower oil prices in late 2014 and early 2015 were insufficient to force unconventional production lower. A longer period of much lower prices may be needed.
See my article in the UAE’s National:
The shale recession is over. What’s next?
http://www.thenational.ae/business/energy/the-shale-recession-is-over-so-whats-next#full
Steve,
I don’t understand what you mean by the “shale recession” is over. I assume that you mean that the drop in rig count has ended from your The National article.
First of all, the rig count for Bakken-Eagle Ford-Permian horizontal rigs was down 7 this week.
But let’s assume that rig counts are stabilizing. And you assume that all is well for shale plays? Wow. Have you looked at their Q1 earnings reports? Capex-to-cash flow ratios have tripled since Q4 2014. Q1 negative free cash flow for the tight oil-weighted companies that I follow is equal to most full years for them!
You can’t measure the economic health of the shale plays by the amount of other-people’s-money they squander–that’s like saying that Greece’s recession/depression will be over as soon as their latest EU bailout deal is done.
I think that the troubles for U.S. producers are just beginning. Credit re-determinations will happen in Q3 and reserve write-downs will happen based on a 2015 SEC average price that is at least 25-35% lower than in 2014 (assuming the H2 prices average $70-90/barrel), they will have to write down huge reserves substantially lowering their net asset values. Plus, hedges made when oil prices were still around $90/barrel will expire by Q3 and Q4 reducing cash flow even further.
You want to support a demand recovery scenario that is not supported by any data so far and that no one else has detected–just hope based on indirect measures that I mention in my post. That’s fine but you should respect the data to the contrary in your commentary.
By the way, my anti-spam software rejects pasted URLs in comments on my blog. The purpose of my comments section is to say what you think and not to re-direct readers to other sites.
All the best,
Art
Couple minor points (obvious but worth mentioning):
1. Peak in growth of demand is not same as peak in demand.
2. Low oil prices are good for consumers. (It’s NOT bad news if “hundred dollars here to stay” becomes “sixty dollars here to stay”.)
———-
SK’s article is nice, like the contrast of shale and ultradeepwater majors stuff. Nuanced disagree at the end. Key point is that shale is the marginal barrel. So it sets price. That’s how marginal barrels work. It doesn’t matter “if it recovers” (now), because if price starts to go up, it will recover THEN.
Of course, what exactly is the equilibrium is an unknown. I think the market decided that 52 made more sense than 60 last week. But if it’s 50 or 60 or 65, is trees for forest.
The key issue is 100 versus 60. US shale has proven a lot of people wrong who poo-pooed it. First it would only help a few local landowners and E&Ps, but not be million+ production. Then it would run out in a couple years. Then it would not affect world prices. Yeah, it’s not like finding another Ghawar. It’s not magic. But it’s still an incredible new phenomenon.
The blip up in rigs was interesting, but 52 is a big difference to 60. Would not be surprised with another drop in rigs, now.
Nony,
I don’t believe that I equated demand with demand growth in my post.
It is a big mistake to confuse production volumes with profitability especially when companies are spending other people’s money. I, for one, never made any predictions about production volumes from tight oil except insofar as proven reserves are concerned. Using proven reserves (proven producing and proven undeveloped) from the EIA, there are 3 years of tight oil reserves assuming ~5.5 billion barrels per year of U.S. average consumption and that tight oil is the only source of oil–not really fair, but a good quick way to determine how big is big.
I would hesitate to call tight oil “an incredible new phenomenon” because it is not new. Austin Chalk and Bakken have been producing tight oil from horizontal wells for decades and fractured shale production has been around since the earliest days of the oil business. I am not minimizing the contribution or importance of tight oil.
What do you mean by tight oil representing the “marginal barrel?” The marginal cost of production is what it costs to produce the next incremental barrel. That cost is different for all producers and plays.Whatever we think the break-even cost of tight oil may be, it is clearly not the lowest cost oil. Please see my post that shows Schlumberger’s estimates of the cost of oil from different plays and places.
If tight oil costs $75 to produce the next incremental barrel (as Sclumberger believes), then tight oil is not the “marginal barrel” until oil price is $75/barrel. If oil price is $55/barrel as it is today, the marginal barrel is the oil that can be produced for $55/barrel but it is certainly not tight oil.
For someone who calls him- or her-self a “civilian” in oil and gas matters, you make a lot of authoritative statements.
Please see my comments to awbeattie about your mis-informed ideas about using gas futures strips to predict prices a decade out.
All the best,
Art
Still waiting for all the shale producers hedges to expire. Then we will know if there is the financial wherewithal to maintain shale production at spot prices.
I live in Oxnard CA (Ventura County). Currently there is an NRG natural gas peaker plant on the shore in Oxnard which is due to retire shortly. There is also a smaller nat gas plant nearby, also due for decommissioning. What Big Oil/Utility wants to do is raze the big plant and construct a much larger nat gas plant on its footprint. The Oxnard City Council has voted 5-0 against this plan. Apparently the fossil folks have not really even costed out a renewable energy/storage alternative, although that may end up being no more costly. Certainly in the long run.
My question is: with nat gas (Henry Hub) around $2.7/mmb due to the vast quantities of shale gas currently available, how long will the gas industry be able to count on reasonably priced gas? Clearly, this unconventional gas is currently selling below the price of extraction/transportation, and shale gas has the very same fast depletion issues as shale/tight oil. It would seem that everyone is licking lips at a nat gas bounty which may not survive the decade. There’s another town hall meeting next week. Thoughts?
Thank you.
AW,
If you have not read my December posts on the natural gas supply controversy, I suggest that you start there.
Secondly, I recommend against taking advice from other commenters on my website since neither of us know their backgrounds or credentials.
Using natural gas future strips as a predictor of future prices reflects great inexperience. All you need to do is to look at the volume of trades or contracts beyond 3-6 months and you will see that no one spends any money on futures even half-a-year much less a decade out as Nony has proposed.
Natural gas will be more expensive in the future because of exports to Mexico and elsewhere. Everyone agrees on this but there is controversy about how much more. Read my earlier posts and ask your next questions but please, be careful about suggestions from unknown people on this site.
All the best,
Art
Nony, thank you for the tip.
I question whether the futures take into account that several companies on the Gulf coast are going to be freezing gas and sending it abroad, where the world price is considerably higher. Additionally, there’s a plethora of companies eagerly planning to use the gas for seed stock. And for virtually every coal mine that closes down, more nat gas will “ride to the rescue.” Then there’s the people who want to replace gasoline with cheap nat gas. On top of that, there are serious environmental issues being raised about robust fugitive methane.
I’m not so sure nat gas is the right horse to ride.
Thoughts?
Is that production surplus showing up as an increase in inventories?
Matt,
Where do you suggest that I look for those inventories because all I have are OECD through IEA, hardly the world. OECD inventories are about 150 mmbo above normal levels plus another ~100 mmbo in various storage facilities.
All the best,
Art
People need wages to live. In a world with “consolidated needs” people have their legerdemain needs met and are only interested in security daily needs such as housing, food, necessities, energy. In terms of consumer goods we are secure. Sure everyone would love having a little extra but almost nobody can afford the steep prices for actual luxury goods.
The only places that still have growth in this context are developing nations. Over there there are still lots of people that experience strong urgency – sadly their labor is not rewarded at an equitable level as to allow them reasonably swift access to various goods.
That’s why the world is stagnant in terms of this nebulous concept called growth. The amount of misery (or sacrifice) does not acceptably or feasibly towards rewards. Rewards are “experienced” as psychologically inadequate squared against work required. Hurdles are too high, sacrifices to big, whatever we can have is experienced as unrewarding, or a “chore”.
We need completely new realms of goals to make people “aspire” but I can’t for the life of me envision what that might be.
Khannea,
Population is the root of most world problems including (but not limited to) climate change and peak oil. The problem isn’t fossil fuels or the lack of them–it is too many people on the planet using too much of them.
The invention of a method to produce nitrogen from air (Haber-Bosch, 1911) to make commercial fertilizer allowed population to increase beyond the planet’s ability to support it without serious side effects.
An exploding population was and is the source of economic growth–more people who need and buy more stuff. Part of the calculus of low growth has to be reduced population eventually.
Ouch. Let’s see that in the Sierra Club’s agenda instead of sad polar bears on tiny icebergs!
All the best,
Art
Uh oh. AB has joined the too-many-people-on-the planet crowd. AB: you will not find that pleasant company. Lotta 1%ers there. Fascism avec truffles.
pogohere,
I am a scientist. I look at the facts based on the information available. That does not mean that I am part of the true believer groups that you mention. It doesn’t mean that I am right either.
Thanks,
Art
Art,
I have revisited your earlier posts both on shale gas and tight oil. I have also revisited the links to David Hughs, Nature, etc. I have been following the industry, as an amateur, for some time.
The problem is this: The CPUC, along with SC Edison, is about to spent a ton of money to build a brand new natural gas peaker plant. I assume the working life of the plant will be ~30-40 years. Now you know, as do I, that there is virtually no way for that plant to economically produce electricity from nat gas for that whole time. It won’t even be producing economically on day 1, given the rapid advances in utility solar pv/storage. BTW, my main expertise is in solar pv.
How do I/we go about stopping their folly? (or, realistically, their business-as-usual greed. As you may know, the 12 year head of the CPUC is likely to get indicted shortly for his cozy relationship with SC Edison regarding the mess at San Onofre.)
Do you have a short presentation (PowerPoint?) that can be presented to all at the Town Hall meeting next week? Any thoughts/ideas are appreciated. Thank you.
AWB
Mr. Berman I would like your input on why rail traffic carrying petroleum products has been falling and is now lower than 2013 levels? I thought the only reason it was transported by rail was because pipelines are at full capacity and still are.
Sorry forgot the link to AAR.ORG
https://www.aar.org/Pages/Freight-Rail-Traffic-Data.aspx#weeklyrailtraffic
Rushabh,
The data in the link that you sent appears to be misleading because the units are rail cars. EIA now publishesmovements of crude oil by train and this data shows barrels of crude oil per month.
EIA data shows that the volume of oil by rail increased continually through December 2014 and since declined by about 18%. This drop appears to be price-related.
All the best,
Art