Capitulation Nation
It seems everyone is getting ready to capitulate. The Federal Reserve, U.S. shale producers and even Russia and OPEC. Oil prices are almost 21% from the capitulation low as there are signs that U.S. oil output is peaking and talk of an OPEC/non-OPEC summit is gaining some traction even as it is being met with skeptics. This comes as the Federal Reserve acknowledges that the economy has slowed since December and the pace of the Fed rate increases may be back on hold! We are data dependent again. With a pause possibility of interest rate increases, that should give oil support because the acknowledgment from the Fed that rate increases are not etched in stone will take away some dollar strength and will take away some downward pressure on oil. Yet at the same time slowing economy fears could slow demand expectations in the U.S. where we saw the Energy Information Administration report record supply. Still a drop in Cushing, Oklahoma supply and a drop in U.S. output is raising speculation that oil output has peaked.
Reuters reported that Russian officials have decided they should talk to Saudi Arabia and other OPEC countries about output cuts to bolster oil prices. Russia has downplayed this talk because they don’t trust the Saudis. Yet it is possible the pain of low energy prices may cause them to capitulate.
A report by Core Labs is expecting a tightening of global oil supply. In a report the company continues to anticipate a "V-shaped" worldwide activity recovery in 2016. Global demand for oil will continue to improve, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that Core believes will continue through all of 2016.
The company currently believes that U.S. land production peaked in March 2015 and has fallen since then by over 600,000 barrels of oil per day, some of which was offset by new additions to production in the Gulf of Mexico as a result of recent field developments coming on-line in 2015. Given the current depressed commodity prices, Core believes further new additions to production in the GOM will not be sustainable. Based on currently available worldwide crude oil production data, coupled with internal Core Lab data, Core has increased its estimate of the net worldwide annual crude oil production decline curve rate to 3.1% from 2.5%. This additional 60 basis points decline is predicated on sharper decline curve rates for tight-oil reservoirs and the significant decline in maintenance capital expenditures for the existing crude oil production base.
At current U.S. activity levels, Core predicts 2016 crude oil production to be lower year-over-year; perhaps falling by over 900,000 bopd in 2016. This, coupled with the continuing decline in international production and the continuing increase in global energy consumption, should create a tight crude oil supply market for the second half of 2016, which should lead to increased crude prices and industry activity levels worldwide.