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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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IEA’s Shocking Revelation About U.S. Shale

Shale

The oil market is exhibiting signs of having reached a “new normal,” according to the IEA, with the floor for oil prices jumping from $50 to $60 per barrel. But a few factors could poke holes in that price floor, and market watchers should be careful not to become overly optimistic about the trajectory for oil prices, the agency says.

In its latest Oil Market Report, the Paris-based energy agency says that a confluence of events have pushed up Brent prices. Lower-than-expected oil production figures coming out of Mexico, the U.S. and the North Sea have combined with unexpected outages in Iraq (-170,000 bpd in October), Algeria, Nigeria and Venezuela. Those outages, plus the geopolitical turmoil in Iraq, and especially Saudi Arabia, have heightened tension in the oil market.

Inventories also continue to decline. OECD commercial stocks fell below the symbolic 3-billion-barrel mark in September for the first time in two years.

That seems to have put a floor beneath Brent crude prices at $60 per barrel, creating a “new normal” after prices had bounced around in the $50s for months. But the IEA cautions that the floor is not a solid one, and that a “fresh look at the fundamentals confirms…that the market balance in 2018 does not look as tight as some would like.”

For one, some of those outages are temporary. North Sea and Mexican production recovered from maintenance, Iraq is scrambling to restore output (and raised exports from its southern fields to compensate for outages in the north), and shut-ins related to Hurricane Harvey in the U.S. have largely been restored. Libya and Nigeria saw their output inch up in October. Related: The Dangers Of A Bullish Oil Market

But the real news is that the IEA downgraded its demand forecast for both this year and next. The agency lowered its 2017 forecast by 50,000 bpd, which may not seem like much, but is the result of a more recent slowdown – the agency says that demand in the fourth quarter will likely end up being 311,000 bpd lower than it previously thought. There are a variety of reasons for this, including fewer heating degree day numbers for the winter, lower demand in the Middle East (Iraq and Egypt), and some “modest changes elsewhere.”

On top of that, oil prices have jumped 20 percent over the past two months, putting a dent in demand. The IEA assumes a price elasticity of oil demand at -0.04, which means that every 10 percent increase in prices implies a 400,000-bpd decline in oil demand (given that total demand is at nearly 100 mb/d).

Overall, the IEA revised down its 2018 oil demand forecast by 190,000 bpd.

The deceleration in demand will leave the market with a surplus in the fourth quarter, and that slowdown will continue into 2018. Global supply will exceed demand by a rather substantial 0.6 mb/d in the first quarter of next year, and the surplus will linger in the second quarter, narrowing to 0.2 mb/d.

That comes after a lot of progress was made this year in lowering inventories. The supply surplus suggests that inventories will resume their climb for the next few months, perhaps through mid-2018.

The sudden pessimistic outlook for the oil market is a symptom of explosive growth from U.S. shale, which, combined with other non-OPEC producers, will result in an additional 1.4 mb/d in fresh supply in 2018. That is a staggering number, and so large that “next year’s demand growth will struggle to match this,” the IEA said. The agency warned that “absent any geopolitical premium, we may not have seen a ‘new normal’ for oil prices.”

In a separate report – the IEA’s annual World Energy Outlook – the agency dismissed predictions about peak oil demand, arguing that any increase in EVs will be more than offset in robust demand growth from other sectors, including trucks, aviation, maritime transport and petrochemicals. Related: Is Peak Permian Only 3 Years Away?

Moreover, the U.S. will apparently be the one that meets that growth in demand. The IEA said that the U.S. shale revolution will mean that combined oil and natural gas will have to rise to “a level 50% higher than any other country has ever managed.” The IEA says that the 8 mb/d increase in tight oil production between 2010 and 2025 “would match the highest sustained period of oil output growth by a single country in the history of the oil markets.”

In other words, the shale revolution still has a long way to go, and when all is said and done, the U.S. will have added more supply in a shorter period of time than even Saudi Arabia did at its peak.

Taken together, the two reports from the IEA may have just burst the oil price bubble – prices plunged on Tuesday, erasing a large chunk of the gains seen in recent weeks.

By Nick Cunningham of Oilprice.com

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  • rk on November 14 2017 said:
    Not one word by the IEA or the writer about the 4.5 to 5 million barrels per day that will be lost over the next year because of depletion rates at all the World's aging oil fields. There is not one giant field that has not been pumping oil for at least 40 years. The HSBC report from last year plus many oil service providers all report that this problem will cause shortages by 2020. Why are depletion rates not mentioned?
  • Al on November 15 2017 said:
    Does the IEA manipulate the price of oil through their "timely" reporting, and if so, for who?
  • Jeffrey J. Brown on November 15 2017 said:
    Links to a couple of previous articles:

    The Shale Party Is Going To End Badly Google Alert

    https://seekingalpha.com/article/4104397-shale-party-going-end-badly

    ‘Nothing To See Here’ - Frackers Ignore Rising Well Decline Rates

    https://oilprice.com/Energy/Crude-Oil/Nothing-To-See-Here-Frackers-Ignore-Rising-Well-Decline-Rates.html


    Nick noted that the combined EIA estimate for the legacy monthly volumetric rate of decline in existing tight/shale production was about 0.35 million bpd per day per month from July, 2017 to August, 2017, i.e., the gross rate of decline in existing production, absent new wells.

    The estimated gross legacy volumetric decline increased from 0.26 million bpd in January, 2017 to 0.35 million bpd in August, 2017 (month over month in both cases), which I assume primarily reflected the increase in US C+C production (the higher the production the higher the volumetric decline, especially from these tight/shale plays).

    The legacy decline estimates are from the EIA Drilling Productivity Report (DPR). The estimates, and how to use them, is a controversial topic. One really can't sum the monthly decline estimates, because of the hyperbolic nature of the decline curves, but on the other hand, new (high decline rate) wells are always being added.

    In any case, US C+C production averaged 8.9 million bpd in 2016. The last monthly report (for July) put production at 9.4 million bpd, and the average year to date through July at 9.2 million bpd.

    So, let's assume an average production rate of 9.4 million bpd for 2017 (versus 8.9 in 2016).

    Production in 2017 would be the sum of:

    X (Production from 2016 & Earlier Wells) + Y (Production from wells put on line in 2017) = Assumed average of 9.4 million bpd, total annual volume of 3.4 Gb.

    The problem is trying to come up with the X & Y numbers. We can say that the average month over month estimated decline in existing production in 2017 is probably going to be in excess of 0.3 million bpd per month, but this is different from the annual average decline in pre-2017 production.

    David Hughes has studied tight/shale plays extensively, and he estimates that we need about 2.2 million bpd of new average annual production, every year, just to offset declines from existing wells. Based on this estimate, US operators would need to add an annual average of 2.7 million bpd, to offset a decline of 2.2 million bpd and to show a 0.5 million bpd net increase.

    The data would look like this:

    2016 & Earlier Wells: 6.7 million bpd average rate

    2017 Wells: 2.7 million bpd average rate*

    Total for 2017: 9.4 million bpd

    Note that this implies an estimated simple percentage decline of about 25%/year in existing (pre-2017) production, average annual. I noticed that this is quite close to the Citi Research estimate for the gross legacy rate of decline in US gas production, 24%/year.

    Based on these estimates, US operators--in order to maintain current production--need to put on line the productive equivalent of Mexico's 2016 C+C production + the productive equivalent of Canada's 2016 dry gas production, every year.

    And to put this in context, it's important to remember the financial aspect:

    https://www.peakprosperity.com/blog/110440/why-shale-oil-miracle-becoming-debacle

    . . . . collectively, US shale companies have lost cash in every year of their existence. . . .
    One analyst doing a superior job looking at the details is Rune Livkern of Fractional Flow, who made this excellent chart estimating that in the Bakken play, one of the best-performing shale basin darlings of the entire “revolution,” the cumulative negative cash flow between 2009 and 2016 (a full 7 years of history) totaled some -$32 billion in losses. . . .

    End excerpt:

    For the sake of argument, if the US hit a C+C production rate of about 14 million bpd, it would imply a gross volumetric rate of decline in existing C+C production of about 3.5 million bpd per year. In round numbers and based on the foregoing, in order to maintain 14 million bpd, US operators would need to put on line the productive equivalent of Saudi Arabia's current production every three years, or three Saudi Arabias in nine years.
  • Disgruntled on November 15 2017 said:
    Mmmmm . . . I love pie in the sky with my morning coffee! I'll keep saying it until it changes- we are living in the Age of Propaganda. Interesting timing on the tone of this IEA report. These kinds of projections are really worthless in their value because of the timelines involved and the practically infinite number of influences on outcomes over such a long timeline. It basically boils down to what price for a barrel are they basing their projections on and the potential profit to the operator. At prices of $45-$50/bo, the American horizontal operators are basically running in place. Does the IEA really think supply will increase in the magnitude they have suggested with oil prices like we have? I do think the American industry is capable of it, given the right pricing environment. The IEA, and the reporting media, act like the shale guys will do it out of the goodness of their hearts or something. Those long-term production numbers will never come about unless oil is well north of $100/bbl. I don't think we'll see the 10 mmbopd in 2018 in America unless WTI gets to $60+ and stays there.
  • Harry on November 15 2017 said:
    Fracking is wantonly polluting and contaminating aquifers used for drinking water and husbandry. Sooner rather than later, government regulators will shut down this entire diabolical industry. It's days are truly numbered.
  • Jeffrey J. Brown on November 15 2017 said:
    Note that based on the foregoing estimates, the US would have to put on line 8 million bpd of new Crude + Condensate (C+C) production in the next 3-4 years, just to maintain current production.
  • Lee James on November 15 2017 said:
    For reasons of crude production cost, uncertainty in crude price and demand, the downsides of mass combustion, and world (in)security over supply and sovereign country uses of oil revenue for conflict ...

    do we find ourselves today on the correct energy source merry-go-round?
  • Jeffrey J. Brown on November 19 2017 said:
    Some interesting comments by executives of companies involved in tight/shale plays:


    WSJ: Terrible Month for U.S. Energy Shares (8/27/17)
    Sector down 5.7% as quarterly reports disappoint investors and oil prices languish

    https://www.wsj.com/articles/energy-shares-set-for-worst-month-since-2015-1503846001

    Excerpt:

    Analysts and investors pointed to quarterly reports from companies including Pioneer Natural Resources Co. as key contributors to the sector’s sagging stock prices this month. . . .

    Pioneer is down 28% for the year, with most of that decline coming in August. Pioneer President Timothy Dove attributed the production issues to “train-wreck wells” that have caused “all kinds of problems,” when he discussed earnings results with analysts. Pioneer said it now takes more time to drill those wells, and it has increased costs, too.


    WSJ: U.S. Shale Juggernaut Shows Signs of Fatigue (10/5/17)
    Forecasts that abundant American oil can permanently meet global needs may be ‘myth,’ company leaders warn

    https://www.wsj.com/articles/u-s-shale-juggernaut-shows-signs-of-fatigue-1507195802#comments_sector

    Excerpt:

    Future oil production is notoriously difficult to predict, and a surge in prices could certainly improve the economics of American shale. But a growing chorus of oil industry leaders, including some shale trailblazers, believes U.S. growth may peak sooner than government forecasters have anticipated—a development with ramifications for global oil markets.

    In recent years, shale production has reliably filled any voids in world supply, effectively taming volatile price gyrations. Potential limits to shale growth call into question predictions that this trend will continue in the future.

    “There are no new shale plays that have come forward,” said Mark Papa, chief executive of Centennial Resource Development Inc. and former CEO of EOG Resources Inc. “Their ability to spew forth infinite streams of oil is really just a myth.”

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