There's no question that over the past decade, the U.S. shale oil boom has had a tremendous impact on global oil markets. The surge of U.S. oil production broke OPEC's hold on oil prices - at least temporarily.
The Permian Basin is responsible for the greatest oil production gains in the U.S. in recent years. Over the past eight years, there has been phenomenal production growth in the Permian. Between August 2011 and today, Permian Basin oil production quadrupled, with oil production there topping 4 million barrels per day (BPD) earlier this year:
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Permian Basin oil production.
But recently a number of reports have highlighted a slowdown in U.S. shale oil growth. In its most recent Drilling Productivity Report, each of the six regions tracked by the Energy Information Administration (EIA) - Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian - still showed a year-over-year increased in oil production. Related: Why Oil Tankers In The Middle East Shouldn't Hire Mercenaries
However, if we look at the year-over-year gains over the past few years, there has been a noticeable slowdown in oil production growth. This slowdown is particularly pronounced in the Permian Basin. The most recent estimates in the Permian are that year-over-year production is growing today at just over half the level of a year ago. Production growth there has been in rapid decline since peaking a year ago.
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Permian Basin year-over-year oil production growth.
Should this trend continue, then OPEC's strategy of maintaining production cuts should ultimately bear fruit. As U.S. shale oil production slows and inevitably declines, OPEC stands ready to regain market share.
The wildcard in this scenario is global demand growth, which the International Energy Agency (IEA) recently revised downward for 2019 to 1.1 million BPD. A year ago the IEA had forecast 2019 demand growth at 1.5 million BPD, and subsequently cut that to 1.2 million BPD on slower growth from China.
OPEC is certainly watching the global demand numbers and U.S. production numbers closely. At some point both will fall, and whichever one falls first will likely dictate oil prices for the foreseeable future.
The EIA projects that U.S. shale oil will continue to grow for most of the next decade. Should it falter sooner - while global demand continues to grow at >1 million BPD - then we shall see a return to higher oil prices.
By Robert Rapier
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Comments
Shale oil wells have an inherent Achilles heel in that they have a very high depletion rate ranging from 70%-90% in the first year of production necessitating the drilling of more than 10,000 wells every year at a cost of $50 bn just to maintain production. Moreover, there have also been reports of declining well productivity and rising costs of production.
The projection by the US Energy Information Administration (EIA) that U.S. shale oil will continue to grow for most of the next decade is excessive hype. I project that US production this year will average no more than 10-11 mbd and will decline to around 10 mbd or even less next year.
The US shale oil industry has never been a profitable one. If it was judged by the standard criteria by which other industries are judged, it would have been declared bankrupt years ago. Still, it will be no more in 5-10 years.
The trade war between the US and China has been casting dark clouds over the global economy, depressing the global oil demand and therefore oil prices.
And yet, the fundamentals of the global economy are still robust with the global oil demand projected to add 1.1-1.2 mbd this year with China’s oil imports soaring and projected to hit 11 mbd also this year. Furthermore, the Chinese economy is growing by a very healthy 6.2% in 2019. This is spectacular for the world’s largest economy based on purchasing power parity (PPP) when compared with a 2%-2.5% for the United States and a 1.5%-2% for the EU.
Still, the end of the trade war is nigh because President Trump has no alternative but to end it as it is hurting the US economy far more than China’s. This is because China’s economy is 28% larger than the United States’ and far more integrated in the global trade system than America’s thanks to China’s Belt & Road Initiative. That is why China’s economy can take more punishment than America’s.
China has shown its mettle during the trade war when President Trump blinked first by easing restrictions on Huawei, the Chinese tech giant, in a bid to get trade talks moving again.
Washington had earlier announced a ban that restricts Huawei’s ability to do business with US firms due to national security concerns.
That is why I expect oil prices to rebound shortly surging to the $70s.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London