5 Million Barrels of Lost Production
Crude oil prices are rising even as oil rig counts grow to the highest levels since last April and U.S. production topped 9 million barrels a day. It seems that OPEC cuts and the lingering impact from major capX cuts is giving the market some support. As the Energy Report predicted, OPEC/non-OPEC compliance is at an all-time record high and we are the only source that I am aware of that predicted this outcome.
Reuters News reported, "The International Energy Agency put OPEC's average compliance at a record 90 percent in January, and based on a Reuters average of production surveys, it stands at 88 percent." Whatever the number, it is it is blowing away expectations and even a resurgence in U.S. shale oil output is going to worry OPEC. Because they know that they can maintain market share as the trillion dollars in cut spending will lower U.S. output by an estimated 5 million barrels a day over the next 5 years.
This estimate is from James W. Bunger who says that if $1.0 trillion is the amount of deferred capital expenditures – and I have heard this number before, then it is simple to calculate the amount of deferred production. If you use a round number of $33,000/daily-bbl-capacity this amounts to deferring 30 million barrels/day of supply. I have heard in the past that the decline rate on a conventional crude oil field is on the order of 5-6%/year, or about 5 million barrels/day, globally. This number is hard to find today, but it sounds reasonable.
By the foregoing calculation is sounds like in just a little over 2 years we have deferred about 6 years of production replacement. I don't see how we ever catch up short of a demand-killing price hike. And the longer that price hike is deferred, and the longer it takes to get back to steady state investment flows, the harder the pendulum will swing.
Bunger says that one can vary my estimate of $33,000/daily-bbl-capacity by quite a bit and it doesn't change the conclusion. Higher capex projects like oil-sands and deep water that might push $100,000/daily-bbl-capacity have investment lead times of at least 4 years and longer. He then asks, “Am I missing something or are we guaranteed a huge price spike? Perhaps even more severe than would have been caused by the Hubbert peak oil phenomenon, which would have taken place over a longer period of shifting economic conditions.”
I do not think he is missing anything and I believe that is why we are seeing money managers add to their net long U.S. crude futures and options positions to the highest level since least 2009, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday. The increase is U.S. shale oil production will be a drop in the barrels as compared to OPEC cuts and the cut back in more traditional long term projects. Reuters reported that, “Assuming the U.S. oil rig count stays at current levels, oil production there would see an on-year increase of 435,000 barrels a day in the fourth quarter this year across the Permian, that is a far cry from the 1.2 million barrels of oil a day that OPEC has removed.
For crude oil, last year The Energy Report had one of the most bullish calls on oil and despite some wicked pull packs and historic volatility, we were ultimately proven correct. This year, once again we have one of the more bullish calls for a test of $73.00 a barrel this year. Others are also getting bullish such as Citi Bank and others. It is nice to see Citi get that bullish as they were as bearish as we were when we predicted that oil at that time would fall into the seventies before the OPEC production war. A call we made before Citi.
Natural gas is falling again as we are expected to see only a 3bcf withdrawal from storage. Andrew Weissman says that natural gas could be subject to conflicting forces this week. The fifteen-day forecast shifted moderately warmer over the weekend, creating a downward bias. Further, the EIA is likely to report one of the smallest winter draws ever on Thursday, negatively impacting the market. At the same time, however, demand is likely to increase significantly compared to last week’s paltry level. Additionally, last Tuesday’s fierce sell-off drove the twelve-month strip down to a level that is not sustainable longer term, potentially creating a floor near last week’s lows. You can call me to get his special report.