They Just Don’t Get It
Shale predictions and price predictions, sometimes they just do not get it. According to an article in todays Financial Times, OPEC is shocked by how many hedge funds really have no clue about how the oil market works. OPEC’s Secretary General Mohammad Barkindo, who met with hedge fund managers, seemed shocked that many of them had no ‘basic understanding’ of oil and were less savvy than was widely assumed.
While it is not necessary for hedge funds to understand the market fundamentals it does shed light on one of the concerns that I have been raising. I feel that a basic misunderstanding about shale oil and its limitations could be setting the stage for a future supply squeeze down the road.
I am not alone. The Wall Street Journal reported that a “Shale trailblazer turns skeptic on soaring U.S. oil production. The Journal says that a former EOG CEO questions growth forecasts, says U.S. oil isn’t a ‘big bad wolf’ disrupting energy markets.
The Wall Street Journal writes that “One of the pioneers of the U.S. shale boom plans to deliver a surprising message at a major energy conference here this week: U.S. oil production won’t keep growing as fast as the market seems to think."
Mark Papa, the former chief executive of industry bellwether EOG Resources Inc (NYSE:EOG)., EOG said in an interview he is eager to tell the assemblage of oil chieftains that a widely held view that shale-oil producers can quickly ramp up production, and sustain those levels if needed, is wrong.
“The oil market is in a state of misdirection now,” said Mr. Papa, now head of smaller shale company Centennial Resource Development Inc., CDEV suggesting future supplies might be more constrained than experts believe. “Someone needs to speak out.”
Well we have been speaking out. The Energy Report has long warned that the market was overestimating shale's ability to replace more traditional jects. Years ago, we warned that the market was underestimating shales potential impact and in recent years we warned that the market was overestimating shales ability to replace traditional energy portion. We warned that shales large decline rate and its logistics and the independent nature of the producers would make it impossible for shale oil process to replace Saudi Arabia and OPEC’s role as swing producer. We also warned about the financial fragility of some of the producers. We also warned that we can’t trust in shale alone.
That is one reason why oil is soaring despite predictions by the International Energy Agency that the U.S. will see a shale production surge. The reality is that while production will rise, current production is not meeting demand. The market rallied hard on a report by Genscape that oil supply in Cushing Oklahoma continues to drain, by an additional 660,000 barrels in the last few days. That does not fit the bearish narrative. Global supplies are also draining at a time when you expect them to be rebuilding.
You see when oil did that double dip in 2015, many thought is was because of shale and the glut. It was because many hedge funds did not understand the fundametals. They believed the lower for longer mantra or that somehow shale oil would learn to love oil in the twenties and prosper. Instead we were sowing the seeds of the most significant bottom in oil in a generation. Now, many are starting to see what we saw back then and that is why oil is doing as well as it is now.