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Dan Steffens

Dan Steffens

Dan Steffens is the President of Energy Prospectus Group (EPG), a networking organization based in Houston, Texas. He is a 1976 graduate of Tulsa University…

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Energy Crisis As Early As 2016

Energy Crisis As Early As 2016

Low oil prices today may be setting the world up for an oil shortage as early as 2016. Today we have just 2% more crude oil supply than demand and the price of gasoline is under $2.00/gallon in Texas. If oil supply falls too far, we could see gasoline prices doubling within 18 months. For a commodity as critical to our standard of living as oil is, it only takes a small shortage to drive up the price.

On Thanksgiving Day, 2014 Saudi Arabia decided to maintain their crude oil output of approximately 9.5 million barrels per day. They’ve taken this action despite the fact that they know the world’s oil markets are currently over-supplied by an estimated 1.5 million barrels per day and the severe financial pain it is causing many of the other OPEC nations. By now you are all aware this has caused a sharp drop in global crude oil prices and has a dark cloud hanging over the energy sector. I believe this will be a short-lived dip in the long history of crude oil price cycles. Oil prices have always bounced back and this is not going to be an exception.

To put this in prospective, the world currently consumes about 93.5 million barrels per day of liquid fuels, not all of which are made from crude oil. About 17% of the world’s total fuel supply comes from natural gas liquids (“NGLs”) and biofuels.

One thing that drives the Bears opinion that oil prices will go lower during the first half of 2015 is that demand does decline during the first half of each year. Since most humans live in the northern hemisphere, weather does have an impact on demand. I agree that this fact will play a part in keeping oil prices depressed for the next few months. However, low gasoline prices in the U.S. are certain to play a part in the fuel demand outlook for this year’s vacation driving season.

Related: Ten Reasons Why A Sustained Drop In Oil Prices Could Be Catastrophic

Global Demand For Hydrocarbon Based Liquid Fuels

Brent oil prices are now hovering around $60 a barrel. In my opinion, this is quite a bit lower than Saudi Arabia thought the price would go and may lead to an “Emergency” OPEC meeting during the first quarter. But for now, I am assuming that Saudi Arabia is willing to let the other OPEC members suffer until the next scheduled OPEC meeting in June.

The commonly held belief is that Saudi Arabia is doing this to put a stop to the rapid growth of production from the U.S. shale oil plays. Others believe it is their goal to crush the Russian and Iranian economies. If the oil price remains at the current level for a few months longer it will do all of the above.

My forecast models for 2015 assume that crude oil prices will remain depressed during the first quarter, then slowly ramp up and accelerate as next winter approaches. I believe that by December we will see a much tighter oil market and significantly higher prices. In a December 24, 2014 article in The National, Steven Kopits managing director of Princeton Energy Advisors states that, “In permitting low oil prices, the Saudis seek to bring the market back into equilibrium. At present, our calculation of break-even system-wide is in the $85–$100 a barrel range on a Brent basis.”

Mark Mobius, an economist and regular guest on Bloomberg TV recently said he sees Brent rebounding to $90/bbl by the end of 2015.

Since 2005, only North America has been able to add meaningful crude oil supply. Outside of Canada and the United States (including the Gulf of Mexico), the rest of the world’s crude oil production netted to a decline of a million barrels per day from December, 2010 to December, 2013. More than half of the OPEC nations are now in decline. We’ve been able to supplement our fuel supply during the last ten years with biofuels, but that is limited since we need the farmland for food supply.

Liquids Supply Since 2005

I believe the current low crude oil price could be overkill and result in the next “Energy Crisis” by early 2016. Enjoy these low gasoline prices while they last.

The upstream U.S. oil companies we follow closely are all announcing 20% to 50% cuts in capital spending for 2015. We will start seeing the impact on supply at the same time the annual increase in demand kicks in. Our model portfolio companies are all expected to report year-over-year increases in production, but at a much slower pace than the last few years.

A study released by Credit Suisse two weeks ago shows that U.S. independents expect capital-expenditure (Capex) cuts of one-third against production gains of 10 per cent next year. This would imply production growth of 600,000 bpd of shale liquids, and perhaps another 200,000 bpd from Gulf of Mexico deepwater projects. At the same time, U.S. conventional onshore production continues to fall. I have seen estimates of 500,000 to 700,000 bpd declines within twelve months. If these forecasts are accurate, U.S. oil production growth would be barely positive next year and headed for a material downturn in 2016.

North American unconventionals (oil sands, shale and other tight formations) have been almost all of net global supply growth since 2005. If unconventional growth grinds to zero and conventional growth is falling outright, the supply side heading into 2016 looks highly compromised. At today’s oil price, only the “Sweet Spots” in the North American Shale Plays and the Canadian Oil Sands generate decent financial returns to justify the massive capital requirements needed to continue development. Global deepwater exploration is rapidly coming to a halt.

Were demand growth muted, this might not matter. Demand for liquid fuels goes up year-after-year. It even increased in 2008 during the “Great Recession” and ramped up sharply during 2009 and 2010 despite a sluggish global economy. Low fuel prices are increasing demand today and my guess is that, with U.S. GDP growth now forecast at 5% in 2015, we could see demand for fuels increase by close to 1.5 million barrels per day this year. The current IEA forecast is for oil demand to increase by 900,000 bpd in 2015.

If this plays out, the oil markets will be heading into a significant squeeze in the first half of 2016.

The last extended period of low oil prices was 1985 to 1990. In 1985, when oil prices collapsed similar to what’s happening now, the world had 13 million bpd of spare capacity, with 7 million bpd in Saudi Arabia alone. OPEC was well-positioned to comfortably meet any increase in demand.

Today, just about all of the world’s discretionary spare capacity resides in Saudi Arabia and amounts to an estimate 2 million bpd. Lou Powers, an EPG member and author of “The World Energy Dilemma," has said that Saudi Arabia will have difficulty maintaining production at over 10 million bpd for an extended period. If we do swing to a supply shortage, Saudi Arabia may find itself in the position of needing to run the taps full out for much of 2016. In such an event, the world will be headed right back into an oil shock and we will see much higher oil prices than $100/bbl.

Related: The Hidden Costs Of Cheap Oil

Low oil prices will hurt the unhedged upstream companies, but they will hurt the oilfield services sector the most. I’m expecting the onshore active rig count to drop by 30% by mid-2015. Oil price will need to firm up for several months before the upstream companies commit to higher spending levels. That said, the high quality drillers like Helmerich & Payne (HP), Patterson-UTI Energy (PTEN) and Precision Drilling Corp. (PDS) will be fine since a lot of their high end rigs will keep working on long-term contracts. By 2016, they will have gained market share.

Remember, North America and deepwater are the only places with meaningful production upside. If crude oil prices move below $60/bbl and stay there for even six months it could prove catastrophic to non-OPEC supply. At some point, OPEC action may become necessary.

“But perhaps not by the Saudis. Russia’s position is comparable to Saudi Arabia’s. Either could cut production by meaningful quantity, but the Russians need the incremental revenue more. Saudi Arabia would be right to argue that any calls for production cuts should be directed to Moscow. OPEC could cut production to prop up prices and increase revenues. But for now, a better strategy (for Saudi Arabia) would be to hang back, deflect criticism, and let events play out. If the Russians are thinking clearly, Moscow will cut first.” - Steven Kopits the managing director of Princeton Energy Advisors.

The best news for all of us is that Iran may be quite willing to put an end to their nuclear enrichment program a few months from now. I believe this is the real reason for what Saudi Arabia is doing.

By Dan Steffens for Oilprice.com

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  • Fern on December 31 2014 said:
    here is my two points for 2015:
    -Saudia Arabia have 30 000 000 citizens.
    petrol revenues per citizen are = (10 000 0000 barils x 60$ x 365 )/ 30 000 000 = 7300$ / year/citizen

    conclusion= 7300$ per year per citizen = not sufficient ... they have to drill , whatever the revenue .

    -for a barrel at 150$ per baril = Japan is ready , Europe is ready , south America have petrol , Africa have petrol , the only problem is ... for China.
  • george on December 31 2014 said:
    With the advent of futures trading the oil industry suddenly became price taker instead of price makers and lost control of their product pricing.... how did this happen to such a large and vital industry? Now, prices are "controlled" by a cabal of arbitrage opportunists expecting an industry with five or more year development timings to balance supply on a razor's edge.

    INSANITY is what we have now.

    There is no glut. Even the North Dakota Department of Energy says that the Baken has probably peaked out or will soon peak out at about 1.5 mmbo/d and that it will decline quickly from that. Shale is a project, not a factory or steady source of supply. It declines too quickly and is an energy treadmill of drilling. Everybody who understands oil understands this.
  • moderateGuy on December 31 2014 said:
    This is nonsensical. Yes, the "unconventional" oil is unprofitable below ~$60 per barrel and it will likely stop if prices stay below that level. However once it does stop, the supply will shorten, the price will go up and the "unconventional" drilling WILL RESUME, because it will, once again, be profitable!
    Good God, haven't you people even heard, however briefly, how capitalism works?
  • Ken Church on December 31 2014 said:
    This article's prediction of oil prices appears to hinge on a status quo world. Instead we have a symphony of contributors. The symphony driving oil prices in 2015 will be...
    1. Russia gets back on terms with the world or not.
    2. Iran quickly settles its Nuclear issues with the world or not
    3. Libya gets back into production or not
    4. Greek politics, new govt. votes to leave EU
    5. Libya civil war or return to a more civilized country
    6. economic chaos in Venezuela or not
    7. calamity in the financial sectors supporting shale oil drilling
    Any/all of these events and others yet to be named will be the biggest contributors to the price of oil in 2015.
  • Michael on December 31 2014 said:
    "Everybody who understands oil understands this."

    I hate it when people say things like that. If someone says "everybody who knows agrees with me" they probably don't know as much as they think they do.

    And many energy companies do see shale production as something similar to a factory or assembly line. Drill, frac, produce, repeat. Same design everywhere.

    Also, I think ND sees their state's resources as a long term play (60-80 years plus). And they just hit 1.1 MMSTB/Day this year. 1.5 is a long way away from that.
  • Bart_dude on January 03 2015 said:
    Very well researched and valid article on the true state of the oil business today. I have to agree with you Dan, and I think Yergin does too.
  • nero on January 03 2015 said:
    That first point was well said, Michael.

    I'm reading countless articles on oil price forecasting, studying history myself, brushing up on every relative fundamental and drawing any possible suggestions from past technical oil price behaviour, and I can firmly state this:

    I have no idea where they're going.

    Some experts seem adamant that over the next couple of years, $60 will be the high mark. Others are certain that this is a low, and prices will soon rocket back past $100 and far beyond.

    With so many technical and fundamental factors in play, all with figurative cards to their figurative chests, I think it'd be foolish to invest however one sees fit at this point. And I don't envy those who are paid to produce forecasts.
  • Daryl on January 04 2015 said:
    The article fails to note the major contributor to the oil price - Demand!
    The world is facing both an ageing and reducing population which means lower demand!
    Throughout the world the baby boomers are retiring who don't drive as much and their children can't afford to have kids.
    Oil will go to between $30 and $45 and stay there for 10 years!
    Saudia Arabia's intent to drive others out of the market is only going to bring the price drop forward!
  • Thomas on January 05 2015 said:
    Daryl, I am one of the aging Baby Boomers and work in oil and gas. I know plenty of folks my age that are just waiting for a little warmer weather to crank up the motor home and hit the road due to the low price of oil. Their recreational vehicles burn 4 to 5 times as much fuel as their car that they will be towing. Most of them have been just taking short trips the past few years and now are making plans to visit all the lower 48 states this spring and summer. A lot of them are bringing their grand kids with them. I can't speak for the world but here in the USA things are looking up for the gas burners.
  • Derek on January 05 2015 said:
    I have no predictions. I am not an active player in the Wall St market/racket/'shell game'. I am enjoying the game of global chess being played by SA. I'm curious to know if this really is a way of settling scores agst Iran and Russia over Syrian involvement. Too bad these low prices can't become a permanent thing for the American economy, while we (the West) R&D our way into renewable energies and get away from fossil fuels permanently. National Security is the name of the game, folks. But alas, we don't have a strategy, other than making profit at all cost. How quickly we forget... smdh
  • Robert on January 07 2015 said:
    The damage will already have been done by 2106....
    - $500 Billion in junk bonds associated with the shale production players coming due and
    -$3.9 Trillion in energy derivatives mostly on oil held by our "To Big Fail" big five banks who are on the wrong side of the "bet"....

    This all is set to go "ka-blewie" long before 2016 unless we see a dramatic reversal in crude prices before summer. The odds of a rebound happening aren't all that favorable any time soon.
  • ricky roustabout on January 10 2015 said:
    as a owner of a oilwell service co. I am dismayed by a lot peoples attitudes toward oil and gas.many jobs...American jobs hinge on the price of oil and gas and it seem no one is even bothered by that. and that the low priced oil flowing in from middle eastern countries help fund organizations that seek to hurt or destroy us.maybe putting the images of the beheadings of American citizens instead of bagels or sub sandwiches on the gas pumps would help to put things in perspective.everywhere you look you see buy American,why does that not apply to oil? I know that there are political and financial considerations that affect the price,im not stupid. we have almost achieved zero dependence on foreign oil but because we can save a dollar we throw ourselves right back under the bus. we proudly fly an American flag over the derrick on our rig everyday and feel we are doing our part of bringing home troops and helping rebuild our country and economy to the icon it once was..i heard once some one say" no blood for oil",..but blood is on sale today.
  • Bocken coop on April 12 2015 said:
    The world has always moved forward and big companies have to make more money than ever before and things will always grow once oil is not the # 1 energy sources is when prices could even think of staying low witch will never happen
  • Patrick on January 21 2016 said:
    You might want to update your model
  • David Bump on May 03 2016 said:
    I wonder if the author and commentors have/will look at this again and re-evaluate what they wrote?

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