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Page added on December 31, 2015

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From Oil Glut to Shortage?

Consumption

With the world awash in crude, the oil industry is contemplating a new problem the oversupply could tee up: an oil shortage.

As the oil glut has sent prices to decade lows, plummeting investment by oil-producing countries such as Venezuela and Russia and oil drillers such as Exxon Mobil Corp. and Royal Dutch Shell PLC means fewer barrels will be produced.

That could leave the world in exactly the opposite situation as now: short of oil and willing to pay more to get it.

This may herald the beginning of a cycle that other commodities, from gold to copper, find more familiar—a cycle in which a glut leads to lower prices that lead to investment cuts, which chokes supply and prompts the price gains that lead to renewed expansion and future gluts.

“A big gap is forming in oil-industry investment,” Claudio Descalzi, chief executive of Italian energy company Eni SpA, recently told reporters. “That will lead in two to three years to an imbalance between supply and demand that will push prices higher.”

This year, global exploration-and-production investments will fall by $170 billion, or 20%, according to Rystad Energy. If international oil prices average $50 a barrel next year—a level many analysts said appears optimistic—investment could fall by one-fifth in 2016, the Oslo-based energy consulting firm estimates.

That would be the first time the industry has registered two consecutive years of investment declines in 30 years, according to the International Energy Agency, a global industry monitor.

Wednesday in New York, Brent crude futures, the international benchmark, fell 3.5%, to settle at $36.46 a barrel. U.S. crude dropped 3.4%, to $36.60.

Crude has fallen almost 70% since June 2014, while producers are pumping two million more barrels a day than is needed. Producers in Russia, Brazil and Norway pumped more oil in 2015 than forecasters had projected. Moreover, oil-field investments made years ago are set to begin producing, even as exploration-and-drilling projects scheduled to bear fruit in coming decades are being delayed or canceled outright.

The rout in prices has seen oil companies cut deeply into investment budgets.

U.S. oil producers Chevron Corp. and ConocoPhillips Co. will each cut capital spending next year by about one-fourth, the companies said this month. European producers such as BP PLC and Total SA have also announced large spending cuts.

Tudor, Pickering & Holt, an energy-focused investment bank, has tallied 150 projects that have been delayed, resulting in an estimated 13 million barrels a day of oil production deferred indefinitely. That is equal to 15% of total global output.

A chunk of the deferred oil—20%—comes from projects in Canada’s oil-sands deposits, where extracting crude is particularly expensive. Arctic production and complicated deep-water projects in the Gulf of Mexico and Africa have also suffered, according to Tudor Pickering.

In countries such as Venezuela, Mexico, Nigeria and Algeria, producers are putting off projects needed to reverse the natural depletion that oil fields experience over time. The industry’s average decline rate—the speed that output falls without field maintenance or new drilling—usually runs between 3% and 4% annually. That has nearly doubled this year, estimates Miswin Mahesh, an oil analyst at Barclays PLC.

The oil industry needs to replace 34 billion barrels of crude every year to satisfy expected consumption growth, according to Rystad. Investment decisions for only eight billion barrels were made in 2015, it said.

“The stage is set for a supply crunch down the line,” Mr. Mahesh said. “Supply from existing fields will fall, while new projects won’t come online to replace them.”

Barclays sees Brent reaching $85 a barrel by 2020, while others see the potential for an even steeper rise.

“You could see prices shooting up from $30 to $100 pretty quickly,” said Iain Reid, head of European oil and gas at Macquarie bank. “At some point the chickens will come home to roost.”

An oil platform in the Niger Delta last month. Some analysts say a cycle of plummeting investment by oil companies could lead to lower production, resulting in a supply crunch and higher prices. ENLARGE
An oil platform in the Niger Delta last month. Some analysts say a cycle of plummeting investment by oil companies could lead to lower production, resulting in a supply crunch and higher prices. Photo: George Osodi/Bloomberg News

Miners have been through this cycle several times. A decline in investment and exploration budgets in the mid- to late 1990s led to a falloff in the supply of many metals in the latter part of the last decade. That contributed to a sharp metal-price run-up at the time, which led in turn to the opening of new mines that would later flood the market with metal once again.

There are, of course, alternative scenarios in which prices continue to languish at low levels. Demand for crude could falter, especially if China’s economy remains sluggish. Weak data in recent months has sparked concern about the health of the world’s second-largest oil consumer.

Also, U.S. output of shale oil could remain resilient. This year, after a peak at 9.6 million barrels a day, U.S. production has stabilized at about 9.1 million barrels in recent months.

The IEA sees prices rising no higher than $80 a barrel by 2020, in part because shale production could fairly quickly meet new demand.

Meanwhile, the U.S. Energy Information Administration said Wednesday that U.S. crude inventories rose more than expected in the week ended last Friday. Oil stored at Cushing, Okla., the delivery point for U.S. stocks, increased by 900,000 barrels, to 63 million barrels, a record, the EIA said in its weekly report.

The oil industry was once notoriously slow to turn the taps back on, given the need for larger pieces of drilling equipment and with rigs in far-flung places, from the Nigerian Delta to the North Sea. But the shale revolution has changed that, bringing technology and oil fields that can be brought online much more quickly. That also differentiates oil from metals, in which mines can take up to eight years to develop.

“The oil market is in the killing zone,” said Michael Hulme, manager of the $460 million Carmignac Commodities Fund. “That’s what killing zones are for—to kill supply and set the scenes for the recovery of prices for the survivors.”

WSJ



16 Comments on "From Oil Glut to Shortage?"

  1. makati1 on Thu, 31st Dec 2015 7:09 am 

    Price recovery? To what level? $50?

    Shale will not survive to be revived in 2020.

    WSJ, the pimp rag of Wall Street.

  2. Truth Has A Liberal Bias on Thu, 31st Dec 2015 8:49 am 

    Gotta pump those bonds

  3. twocats on Thu, 31st Dec 2015 9:37 am 

    That’s a lot of number crunching to figure out what the supply gap will be and whether shale can bridge it in the short term once production needs to ramp back up. Keep in mind the target is moving – each month that goes by will erode long-term development, making the shale bridge less likely to succeed.

    All I know is that the bell is tolling once again – the only question is whether the clock is hitting 11pm or Midnight.

  4. penury on Thu, 31st Dec 2015 9:40 am 

    I think I read that the cure for low oil prices is low oil prices. Enjoy the glut while you can.

  5. antaris on Thu, 31st Dec 2015 10:20 am 

    While “time” goes on, so does depletion.
    I just spent a little “time” with this graph from the EIA. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=m
    If you take the the shale blip out, US conventional production would be 3.8 Mbd today and by Dec. 2020 it would be 2.8 Mbd. By the “time” shale is finished so will be the other stuff. I think we are running out of “time”.

  6. geopressure on Thu, 31st Dec 2015 11:35 am 

    Yes, the tide is turning…

  7. JuanP on Fri, 1st Jan 2016 1:01 am 

    Worst year for oil rigs in quarter century, http://www.bloomberg.com/news/articles/2015-12-31/worst-year-for-oil-rigs-in-quarter-century-closes-with-a-whimper

  8. pat on Fri, 1st Jan 2016 8:52 am 

    ‘Crude has fallen almost 60-70% since in the last 6 months of previous year. ‘producers are pumping two million more barrels a day than is needed’. how much does 2 million makes out of the total consumed daily by the global? the prices remaining at such low levels and presumed much lower levels only suggest the global is entering a face of severe slow down.. ‘new demand’ the fall of 2 million demand by new demand(…) the oil can sky jump to triple digits much before..

  9. Boat on Sat, 2nd Jan 2016 12:17 am 

    Jaun P

    Glad to see your using MSM sources for your information now. Your coming around. Keep reading and you will see it’s all going to be ok for at least a decade. There have never been better times world wide.

  10. Apneaman on Sat, 2nd Jan 2016 12:28 am 

    You sound desperate boat.

  11. GregT on Sat, 2nd Jan 2016 12:43 am 

    @ boat,

    If you’re not able to communicate at a level that most children are capable of, how do you expect anybody to take anything at all that you say seriously?

  12. JuanP on Sat, 2nd Jan 2016 1:19 am 

    Boat, I will read and post here any oil or energy related articles I come across on the web. While I don’t visit MSM websites seeking news, I will follow links that lead me to them. Most articles contain useful info in them even whether I disagree with their opinions and conclusions or not. I like reading things I disagree with and I will change my mind if the writer’s views seem truthful, accurate, and unbiased. I seek the truth and I love being proved wrong because it means I have learnt something new.

    I don’t want to be right, I want to learn the truth, and for that it helps to consider different perspectives.

  13. Kenz300 on Sat, 2nd Jan 2016 9:04 am 

    Boom ….bust…….
    the smaller producers go bust and the big ones pick up the pieces on the cheap……………..

    Worst Year for Rigs in Quarter Century Closes With a Whimper

    http://www.bloomberg.com/news/articles/2015-12-31/worst-year-for-oil-rigs-in-quarter-century-closes-with-a-whimper

  14. Boat on Sat, 2nd Jan 2016 9:49 am 

    Juan,

    That is exactly how most people view all information. It is the doomer narrative that blames MSM as a bad source of information. One should look at all information through a filter of common sense and context.

  15. GregT on Sat, 2nd Jan 2016 11:40 am 

    Boat,

    Most people view the MSM message as a good source of information. The MSM is owned and controlled by the same interests that own and control the central banks, Big Oil, and the large multinational corporations. The message is one of indoctrination in support of infinite exponential growth, BAU, and US-centric global hegemony. The very things that threaten the future of not only our own species, but life as we know it on the Planet Earth. The MSM message is not a bad source of information, it is the worst source of information. It is the MSM itself that is responsible for the dumbing down of the masses, and it has been done purposefully.

  16. onlooker on Sat, 2nd Jan 2016 11:54 am 

    You go Greg! Spot on.

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