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OPEC Expects U.S. Oil Production To Rise In 2016… Really?

OPEC Expects U.S. Oil Production To Rise In 2016… Really?

The OPEC 2015 World Oil Outlook came out a few days ago. They basically produce two outlooks, a medium term outlook to 2020 and a long term outlook to 2040. I found their medium term outlook pessimistic in some cases too optimistic in others. But I found their long term outlook to be wildly optimistic… in most cases.

In all cases below I chart crude when it is available and “liquids” only when no other option is available. The data is in million barrels per day.

Here is their medium term outlook chart. Notice they expect both OPEC and Non-OPEC crude to decline in 2016 but Non-OPEC crude starts a slow recovery in 2017. They say OPEC crude will not start their recovery until 2019.

Here is their long term outlook. Notice the tremendous growth in “Other Liquids”, whatever that is.

OPEC expects Non-OPEC crude to be down in 2016 but to begin a slow recovery in 2017. I think that outlook is way too optimistic. Related: $10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC

OPEC thinks their short term production has peaked and will decline by 100,000 barrels per day next year and hold on a flat plateau until sometime after 2020.

Adding OPEC and Non-OPEC crude we see that OPEC thinks World crude production will decline next year but begin a slow increase starting in 2017. Also notice that OPEC’s estimate of current crude production is well below what the EIA says is being produced and even below JODI’s production numbers. I think this is because OPEC does not count Condensate. Other than that I do not have an explanation.

OPEC expects Russian liquids production to decline by 100,000 bpd next year and hold at that level for five years, or perhaps longer. They expect Russia to increase production by 200,000 bpd over the next 20 years.

OPEC thinks China will peak next year, 100,000 bpd above the 2015 level. I think that is just a tad optimistic.

I find OPEC extremely overoptimistic concerning Brazil. So does Petrobras. Petrobras’ troubles highlight bleak prospects for Brazilian oil production to 2020

The analyst adds that Petrobras’ recent revisions to its production plans, forecasting 2.8 MMbpd by 2020, 1.4 MMbpd less than 2014, will be adjusted further. This is due to more recent Petrobras CEO statements indicating less capital expenditure and a larger divestment strategy. One key change in the investment plan for pre-salt production has been a significant reduction in the number of FPSOs brought online by 2019. Related: 5 Possible Surprises In Energy For 2016

It is with the US and Canada where OPEC is most optimistic. They see US and Canada liquids production continuing onward and upward with not much of a pause.

OPEC expects light tight oil to increase in 2016. They only show a slight uptick in LTO in 2016 but an uptick nevertheless. I just don’t believe that is possible. They actually pick U.S. LTO peak, 2023.

Tight crude production from the US plays increases from 3.8 mb/d in 2014 to about 4.9 mb/d by 2023. It declines slowly thereafter to 4.2 mb/d in 2040. While the Canadian plays are not as prominent as the US plays, they increase their tight crude production throughout the forecast timeframe from under 0.2 mb/d in 2014 to less than 0.5 mb/d by 2040.

Here we see the actual LTO production figures that OPEC is expecting. They have Light Tight Oil increasing by 100,000 barrels per day in 2016. They are saying the price collapse only slowed down the growth in LTO production and it will pick back up in 2017, though it will still be increasing at a much slower rate than in years past. Related: Germany’s Prospects For Energy Storage

Okay, if LTO has been responsible for the huge gains in the US and some in Canada, what does OPEC’s production look like if we remove LTO from the picture. Well production just keeps on increasing… according to OPEC anyway.

Production just keeps increasing and increasing. Counting LTO the US and Canada peaks around 2025 but that is only because of the decline of LTO. The rest, which was declining before the advent of LTO, has now turned around and just keeps increasing into the far distant future.

But what about prices. Are not prices killing production in the oil patch, especially in the USA? Well the 2015 World Oil Outlook does not present any price charts or tables. But they do tell us what prices need to do in order for their reference case predictions to be fulfilled, all on page 8. Bold mine.

In this Outlook, the price of the ORB is assumed to average $55/b during 2015 and to resume an upward trend in both the medium- and long-term. The medium-term foresees a $5/b increase each year so that a level of $80/b (nominal) for the ORB is reached by 2020, reflecting a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market. This, in turn, will provide support to prices. Translated into real prices, the oil price is assumed to be $70.7/b by 2020 (in 2014 prices).

The long-term price assumption is based on the estimated cost of supplying the marginal barrel which will gradually move to more expensive areas. This continues to be the major factor in the period through to 2040. The price of the ORB in real terms is assumed to rise from more than $70/b in 2020 (in 2014 prices) to $95/b in 2040 (in 2014 prices). Correspondingly, nominal prices reach $80/b in 2020, rising to almost $123/b by 2030 and more than $160/b by 2040. It should be noted that these are not price forecasts, but working assumptions to guide the development of the Reference Case scenario.

They are saying that if prices increase by $5 a barrel a year, from $55 a barrel that they assume will be the 2015 average, then all will be well after only a slight dip in production in 2016 and 2017. So in 2016 we should see prices averaging $60 a barrel if they get their “Reference Case” started off on the right foot.

It is also interesting to note that they see Non-OPEC production peaking around 2025 but OPEC still increasing production, not just enough to offset the Non-OPEC decline, but enough to keep world oil production increasing through 2040.

Just one more chart with data from the EIA’s latest Monthly Energy Review. The EIA Monthly Energy Review has November US C+C production at 9,181,000 barrels per day. That is 404,000 bpd below the peak in April 2015 of 9,585,000 bpd and just 7,000 bpd below the production of November 2014.

U.S. production is clearly declining and that decline will, far more likely than not, accelerate in 2016. The point is that OPEC projection of U.S. crude oil production is clearly in error. It is just flat out wrong, no other way to say it. I know, the production numbers for 2016 are not in yet, but the chance that U.S. 2016 crude oil production numbers will be above the 2015 production numbers is slim to none.

OPEC has tried to hedge their bets by combining U.S. production with Canadian production. But even that will not work. U.S. plus Canadian 2015 production, in my estimation, will clearly be above U.S. plus Canadian 2016 crude oil production.

I may be wrong with this prognostication, but that remains to be seen.

By Ron Patterson

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