This week, we take a look at some of the most importanr figures put out in the energy sector over the last seven days. With the release of the IEA’s World Energy Outlook, there is no shortage of data from which to analyze trends in oil and gas over the coming weeks and months.
Let’s take a look.
Upstream oil and gas investment falls off a cliff
- Low oil prices are forcing companies to scramble. Upstream investment has been getting the axe, with total investment dollars falling by 20 percent this year from 2014 levels.
- This will affect long-term production levels, but the effects on production have largely not yet been felt.
U.S. shale on the decline
- Shale production is affected much more quickly than conventional oil fields.
- U.S. oil production continues to take a hit, with the major shale regions expected to post month-on-month declines. The EIA sees the Eagle Ford suffering the worst, projecting a loss of 78,000 barrels per day in December.
- Natural gas production is also showing several months of decline. The nation’s most prolific formation, the Marcellus, is expected to decline by 229 million cubic feet per day in December, suggesting that U.S. gas production has peaked for now.
Global oil reserves and production
- The chart above beautifully illustrates the world’s still overwhelming dependence on the Middle East for oil, notwithstanding the recent surge in oil production from U.S. shale. The Middle East still holds about four times the amount of oil reserves as North America. And the run up in shale production could be testing its limits, not just because of the collapse in oil prices. The IEA expects U.S. shale to fall in the very near-term, but rebound to 5.1 million barrels per day (mbd) by 2020, but then fall again to just 3.3 mbd by 2040. In other words, shale could be a blip in the grand scheme of things, after which we are back to depending on OPEC for oil.
Oil production to 2040, by country
- Aside from the U.S., other major non-OPEC countries will see their long-term production impacted by recent cuts in upstream investment.
- There are also country-specific constraints to growth – lack of pipelines in Canada, a shortage of capital in Brazil, and economic sanctions on Russia.
- Iraq looms large as a future oil producer. Production could double from 4 to 8 mbd between now and 2040. But massive caveats need to be taken into account, not least of which is a concern over security.
- After Iraq, the IEA expects Brazil to chip in the largest increase in oil production. The dramatic shortfall of investment in offshore Brazil, the ongoing Petrobras scandal, and potential asset sales all raise major problems for Brazil in achieving this vision.
- Venezuela is another question mark. It holds the largest reserves of oil in the world, but significant political and financial stresses could keep much of that oil in the ground.
- Again, to reemphasize, U.S. production is expected to peak in the early 2020s and fall thereafter.
Global gas reserves and production
- Natural gas markets are much different than oil. Here the U.S. enjoys a much greater advantage despite still possessing much lower reserves than the Middle East. The U.S. is currently, and will continue to be, the largest natural gas producer in the world. Shale gas now accounts for about half of the total U.S. gas production, and it will continue its blistering growth. By 2020, U.S. shale alone (excluding conventional gas production) will produce more natural gas than any other country. U.S. shale gas even overtakes Russia. Still, natural gas production also grows around the world over the next few decades in nearly every region except for OECD Europe.
o Still, 80 percent of the growth in gas production occurs outside of the OECD.
o China will begin to unlock its shale, allowing it to triple output.
o The Middle East will achieve a two-thirds increase in output to 900 billion cubic meters, a third of which comes from Iran.
Baltic Dry Index
- The Baltic Dry Index has declined, falling close to a five-year low, and the lowest level for this time of year. The Baltic Dry Index measures freight activity, and measures prices for cargo. As such, it is a good barometer of international shipping activity, and thus, it can provide some clues into the health of the global economy.
- The collapse of the index is an ominous sign, pointing to slowing economic activity. The months of October through December are typically more active, as holiday demand leads to brisk trading activity.
- Slowing trade poses a conundrum for central bankers. The U.S. Fed has every intention of raising interest rates, but deflationary pressure raises questions about the strategy.
International rig count
- Rig count movements from around the world are not as dynamic when compared to the United States. Many countries have price supports, or their state-owned companies deploy rigs, making rig count movements less susceptible to market forces.
- Some South American nations have seen the largest drop off in rig counts.
- Saudi Arabia stepped up drilling over the past year as it pursued market share.