Friends, Oilmen, Economists, I come not to bury Sieminski but to praise him.
In case you don't know (I confess I didn't) Adam Sieminski is the Administrator of the US Energy Information Administration, or the EIA. He, or more likely someone in his organization, publishes a monthly forecast of oil production for the U.S. It is called the Short Term Energy Outlook and in this post I am going to take a look at some of those forecasts over the past few years to see how Adam and his team have done.
First though, let me get on with the praise before I get the shovel. The EIA website is a fantastic resource and it puts just about every other organization that monitors oil production and consumption data to shame. They are also pretty transparent, for example the Drilling Productivity Report is one of the key tools the EIA uses to make their forecasts, yet they lay out their methodologies pretty clearly.
If you read that report carefully you can see that production from the average U.S. shale play is now clearly in decline. Related: Does The U.S. Have A Middle East Strategy Going Forward?
But the forecasts in that report only reach out to next month. What if we want to know what will happen in a year or two's time? That's where the Short Term Energy Outlook comes in. I have looked back over the last couple of years to try and assess how great these forecasts are.
Picks up shovel, starts digging.
Well not so good actually. This chart shows a selection of forecasts from January 2014 through to January 2016. Frankly they are all over the shop, but then the EIA have had to deal with a miracle and then a murder. Miracles are by definition hard to forecast, I mean who knew that you could feed five thousand with just five barley loaves and two small fish.
(Click to enlarge)
EIA Short Term Energy Outlook
The miracle I am referring to is the U.S shale miracle, kicked off by shale pioneer George Mitchell who realized that combining two well proven technologies, horizontal wells and hydraulic fracking could coax gas and oil from the least promising rocks. The shale oil revolution got going in 2012 but even in 2014 the EIA forecasters couldn't quite believe how rapidly U.S. oil production was growing. Their forecasts lagged production for most of 2014. Related: Crashing Oil Prices And Dropping Rig Count Take Their Toll On U.S. Output
But trouble was brewing, and forces far from Texas and North Dakota decided that it was time that this miracle should be put to the sword. Ali bin Ibrahim Al-Naimi took on the role of Brutus, opened up the taps and the oil price collapsed. That choked off the flow of capital that has fed the shale oil boom. The collapse in the oil price was followed by a slump in the rig count and finally by an inexorable fall in U.S. oil production. Though that only came after the industry demonstrated far more resilience than forecasters, including me, believed possible.
(Click to enlarge) Related: Statoil CEO: Expect Volatility Now, Price Spike Soon
But if we focus in on Lower 48 oil production, which excludes Alaskan and Federal Gulf of Mexico production, the picture is even clearer. Production went up in a straight line and it's coming down nearly as fast as it grew.
The die is cast, the coming collapse in production is clear, and the EIA's forecasts are catching up with reality and it won't be long before the market is in balance again. Of course once the price recovers we will get another miracle, though next time round I think the EIA will do a good job of forecasting the resurrection of the U.S. Shale industry.
By Steve Brown
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