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Forget The Glut – This Is Why Oil Prices Will Rise

Oil Rigs

The rate of oil production decline in the United States will accelerate in the 3rd quarter. It has already started.

Per the EIA: In the last six weeks:

> U.S. oil production has declined 222,000 barrels per day.

> U.S. oil imports have increased by 512,000 barrels per day.

Crude oil in U.S. storage facilities has declined 10 of the last 11 weeks, despite the sharp increase in imports.

(Click to enlarge)

“The decline curve never sleeps, and always wins.” - David Demshur, Core Labs CEO in their 2nd quarter conference call. "The inevitability of the decline curve guarantees that oil production will slow and the market will find a balance." Coupled with declining production, we live in a world where demand for oil increases "relentlessly" by 1.0 to 1.5 million barrels per day year after year after year.

From Core Lab's Q2 press release:

The Company continues to anticipate a "V-shaped" worldwide commodity recovery beginning in the second half of 2016. One indication is that several U.S.-based operators have recently announced rig additions. Further, global demand for hydrocarbon-based energy continues to increase, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that Core believes will continue through all of 2016 and 2017. The Company has observed that U.S. onshore oil production peaked in March 2015 and has fallen since then by an estimated 1,000,000 barrels of oil per day ("BOPD"), some of which was offset by new additions to production in the Gulf of Mexico ("GOM") as eight deepwater legacy-field developments came on-line in late 2015.

At current activity levels, Core predicts 2016 U.S. onshore oil production will fall approximately 1,100,000 BOPD and will be somewhat offset by deepwater GOM gains of approximately 160,000 BOPD, yielding a U.S. net decline of 940,000 BOPD resulting in a net decline curve rate of approximately 10.1%.

Based on currently available worldwide crude oil production data, coupled with internal Core Lab data, Core estimates that the net worldwide annual crude oil production decline rate is approximately 3.3%. That is supported by recent International Energy Agency ("IEA") reports that worldwide crude oil production continued to fall through the second quarter of 2016. In addition to (declining production in) the U.S., Core expects 2016 production declines in Angola, China, Colombia, Indonesia, Iraq, Mexico, Nigeria, and Venezuela, among others. Related: Is This The Next Big Headache For Oil Prices?

On the company's conference call they said their forecast of a 1.1 MMBOPD decline for the U.S. may be too conservative and if forced to bet, they would take the "over".

The net worldwide decline rate is predicated on sharper decline curve rates for tight-oil reservoirs and the significant reduction of maintenance capital expenditures for the existing crude oil production base. These factors, together with the continuing decline in global production, the accelerated decline in inventories, and the continuing increase in global energy consumption, should create a tight crude oil supply market for the second half of 2016, and result in increased crude prices and industry activity levels worldwide.

Core Laboratories (NYSE: CLB) has offices all over the world and they know what is really happening in all of the world's significant producing basins.

U.S. oil production peaked at over 9.6 million barrels per day in June, 2015: Based on Core Labs' prediction above, U.S. oil production will fall to under 8.3 million barrels per day before the end of this year and will continue fall to under 7.5 million barrels per day sometime in 2017 before it stabilizes. The only thing that will stop U.S. oil production from falling is a sharp increase in oil prices. In my opinion, West Texas Intermediate (WTI) must move firmly over $60/bbl before we will see the increase in capital expenditures necessary to stabilize U.S. oil production.

In my opinion, the only reason for the recent pull back in oil prices is the FEAR that has been created by the Brexit vote.

By Daniel Steffens for Oilprice.com

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  • Trey on July 25 2016 said:
    I'm having a hard time following your logic. You are bullish because us oil production is declining even though you mention imports are up. Who cares if the oil comes from domestic or international? It's still supply. You mention the decline in oil stocks but you fail to comprehend the build in products. Who cares if the oil stocks are going down if the industry using them can not find demand for their products. Essentially, even though we have oil draws, they are fake!
  • Nizi on July 25 2016 said:
    There are more this data to reach a final trajectory of oil prices. for example, Refinery maintenance, decline in number of closed drilled wells. So, I think oil will continue in its current downtrend for the next 1-2 months, then might rebound after Sep, Oct.
  • Steve on July 26 2016 said:
    Agree 100%, great piece. Oil will rise!
  • JHM on July 26 2016 said:
    The crude stocks (ex SPR) fell by almost exactly the same amount last year (over ten weeks). There is nothing to see here but seasonal draws. The only difference is that crude stocks are 56.5M barrels higher than 52 weeks ago.

    Don't be misled by seasonal trends. Stocks need to fall year over year before this market is truly balanced.
  • Ed Sunderland on July 26 2016 said:
    I don't but this story for a second and further, how can we be buying or importing oil when we are exporting crude? Why is the government still delivering less fuel economy in our vehicles through that corn farmer welfare mandate ethanol?

    I also wonder how much oil prices can be manipulated through suspect stories?

    Makes no sense. Also, there is a new revival in vapor fuel technology where in 1970 Shell Oil built a car that ran 300 or more miles on a gallon of gasoline vapor. There is a growing list of vehicles that are now running on back yard technology getting very high mileage. Google fuel vapor technology.

    Why the EPA and government refuses to endorse this tech is all because of big $ influence and the possible reduction of fuel tax revenue. This is why this global warming crud is just that. If the EPA really wanted to reduce carbon emissions they would study the very old but new fuel vapor system.

    Right now Americans have finally received a pay increase from the outrageous $3.60 a gallon we were paying a short time ago. We were all told that it was the price of crude. We began producing on US soil and the false prices began to drop. There are literally millions of oil bearing soil in America that is being denied American citizens and oil production still that can further stabilize fuel costs here.
  • Larry Evans on July 26 2016 said:
    Prices will rise until it become economically viable for the Fracking wildcatters to jump in. At that point they will come back down.

    The days of > $75 barrels of oil are over for good except for the inevitable inflation, the US Government does something really stupid, or there is a World War III
  • henry on July 27 2016 said:
    This author is still same, hasn't changed. He claimed same scenario about 2 months ago but we haven't seen any significant increase. His basis is just only declining production rates. However, there is shale industry waiting like a lion to catch its hunt. Look at the baker hughes' datas, as soon as oil price exceeds $50, shale companies starts drilling again. They adjusted themselves to start and stop immediately based on prices. Bottom line, if there isn't cut rate significantly in the market which is very hard to do, oil prices will increase only by crawling through 2020. Industry flooded oil between 2011-2014 like crazy and takes longer time to balance than anticipated.
  • Ace ibis on July 27 2016 said:
    There will be an over supply of oil into the foreseeable future. This situation has not changed since the end of the Iraq war. The only downside pressure on price point is any threat to Saudi's market share. Otherwise price will remain stable. Periodic outages from current producers will be mitigated by additional production from others.

    We are currently in a period of price stability which will enable all stakeholders to budget accordingly
  • Michael Parish on July 27 2016 said:
    The market current market price of oil differs with your opinion as do future's prices. I'm sure you eventually will be correct, but as I believe Keynes once said, "the market can stay irrational a lot longer than you can stay solvent", or something to that affect. Never argue with the market.
  • Colin MacDonald on July 28 2016 said:
    I would take seriously predictions of a tightening oil market if Corelab is making them. Unlike most armchair prognosticators it's forecasts are based on hard physics. Corelab would have no business model if it didn't get it right. They model reservoir decline and do it well. Again it has to be emphasized that Corelab's forecasts are qualitatively different from those of economists and "analysts"; they are based on hard empirical science.
  • Johnny Braavos on July 28 2016 said:
    Ed Sunderland- exporting crude? What are you talking about? There is a ban in the US for exporting crude, we haven't exported crude in 40 years. Last year they started allowing 2 companies to export condensates, but not crude oil.
  • Amvet on July 29 2016 said:
    Since the US is a net importer of both oil and natural gas boastful talk about us exporting is nonsense aside from small scale for regional or type balance.

    Using US storage as an indicator for global supply-demand balance makes no sense.
  • RS on July 29 2016 said:
    Inventory is being cut 1) where it is expensive to store - i.e tankers. Oil on water saw a big drawdown on 60MMb in June. Don't have the May numbers but it has to be a drawdown as well due to the Canadian wildfires. Oil on water filled in the deficit.

    2) countries that need the to export more to support their currencies - oil producing nations

    Saudi, Brazil, Nigeria, Angola, Iran, inventories are coming down pretty fast. Their inventories are lower by 50 MMbd May15- May16.

    If you compare global yoy ending stocks. They built up till Feb16. Then the drawdown began pretty fast.
  • Kelly on August 01 2016 said:
    Oil prices will not increase until OPEC slows production. For some reason OPEC is continuing to cut it's own throat by jacking up production in a falling market. Personally I am happy will low fuelling costs. Meanwhile OPEC is going bankrupt.
  • kyle on August 16 2016 said:
    This is an incredibly myopic article. The price of crude is low because high cost crude is readily available and the saudi's are running the pipes wide open to flood the market and compete. We all know the end of oil as a global powehouse commodity is coming to an end. Battery technology continues to increase. Energy efficiency continues to increase. Solar and wind continue to eat away at oils underlying market.

    Good luck hoping for steady oil for the next 20 years!
  • Anonymous on September 27 2016 said:
    The reasons for the rise today include a big increase in demand for future contracts by large investment funds, which are betting that prices will rise, in addition to supply disruptions and high gasoline demand
    http://www.reuters.com/article/us-global-oil-idUSKCN0YH01R
    http://www.cnbc.com/2016/06/22/oil-analysts-agree-price-will-rise-but-disagree-on-magic-number.html

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