OPEC’s Serious Decline Forecast For U.S. Shale Is Exaggerated

OPEC is betting that its price war to reclaim market share, mostly from drillers in North America, will force reduced investment in the region this year, “rebalancing” prices that have fallen dramatically over the past 19 months. But the latest news on American output and consumption is sending mixed messages.

OPEC’s latest Monthly Oil Market Report, released Jan. 18, forecasts greater demand for its own oil in 2016 as competitors, hamstrung by low prices, continue to cut back severely on capital expenditures for production, reducing the oil glut caused by the group’s competitors.

“It will … be the year when the rebalancing process starts,” the report said. “After seven straight years of phenomenal non-OPEC supply growth, often greater than 2 [million barrels per day], 2016 is set to see output decline as the effects of deep capex cuts [by non-OPEC producers] start to feed through.”

Competitors are everywhere, but OPEC’s chief target is North America, where hydraulic fracturing for shale oil and oil sands in recent years led to prodigious production in the United States and Canada, respectively.

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OPEC’s forecast may even turn out to be correct, but the closing days of 2015 tell a slightly different story, according to data from the U.S. Energy Information Administration (EIA) and Statistics Canada.

The EIA reported Friday that overall production in the United States in November declined by 52,000 barrels per day to 9.32 million barrels per day, the lowest since June. The drop is primarily attributable to a decline of 57,000 barrels per day in the Gulf of Mexico, but this was offset somewhat by a rise of about 3,000 barrels per day in Texas and 5,000 barrels per day in North Dakota, both shale oil sources.

Even though these data may be two months old, they give traders clues to how soon the U.S. shale boom may decline or even bust altogether. Yet shale production in November was much greater than the 9.05 million barrels that IEA had forecast in October. This only adds to the current oil glut.

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Adding to the supply is that November was the third straight month that saw a drop in U.S. demand for oil, in large part because of milder temperatures in many parts of the country during the autumn and little if any growth in American industrial activity.

Demand declined by 182,000 barrels per day, or 0.9 percent, compared with November 2014, the IEA said Friday in a separate report. Demand had dropped by 0.1 percent in September and by fully 1.7 percent in October, it reported. November’s drop in demand was led by a 5.5 percent decline in the use of distillates, used both for home heating oil as well as industries that rely heavily on diesel fuel.

And yet demand for gasoline, whose retail price has plunged along with that of oil, rose by 188,000 barrels per day, according to the U.S. Transportation Department. Gasoline prices were down to an average of $2.14 per gallon in November, the lowest in 10 months, and have at this very moment sunk far below $2.00 per gallon.

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To the north, while Canada’s been hit hard by the plunge in oil prices, it actually increased oil and gas production in November, Statistics Canada reported Friday, nudging up the country’s gross domestic product by 0.3 percent for the month. This followed a production drop in September, and no change in October.

But while a rise in production can’t be dismissed out of hand, most observers agreed that whatever progress was made in November can’t change the overall trend for an economically weak fourth quarter for Canada.

And none of these reports is necessarily a harbinger for 2016. They merely show that the global oil industry is as difficult to predict as any other and that the only constant is surprise.

By Andy Tully of Oilprice.com

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