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Page added on October 31, 2012

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Does U.S. shale mean cheap global oil by 2020?

Consumption

Does the rise of U.S. shale oil mean fuel buyers can look forward to a multi-year period of crude price decline? Or is oil destined for new record highs above $150 a barrel?

The question is dividing energy analysts who are split on whether or not shale and other predominantly North American “unconventional” supply like Canadian oil sands will be enough to comfortably meet an increase in global fuel demand led by emerging markets to 2020.
That is a shift from the anguished debate back in 2008, the $147-a-barrel high water-mark for oil prices, about whether “peak oil” – the limit of global oil output – had arrived.

“Peak oilers have become almost extinct, destroyed by the arrival of new technologies with the U.S. leading the oil supply change,” said David Hufton of oil brokerage PVM.

“The country with the world’s highest oil demand, both volumetrically and per capita, now finds itself in the position where domestic supply growth far exceeds demand growth with every indication that this is a long term phenomenon. It is a major game changer, not just within the U.S., for the global oil and geopolitical balance.”

Back in 2004, as commodity markets began their long ascent and crude waved farewell to $20 a barrel, no-one came close to predicting oil would swiftly top $100.

The lesson has not been lost on oil forecasters. Normally focused on a year or two ahead, a debate has started about where prices are heading over the next eight years to the end of the decade.

A request by Reuters for forecasts of 2020 prices drew 20 responses from consultants, banks and energy analysts. The poll produced a mean average of $118 a barrel for North Sea Brent, suggesting little change from the current level around $110.

But only five of the 20 are actually predicting prices anywhere near the mean average.

The real story is in the division between the two camps. Setting aside the demand side of the debate, the argument about supply is simple.

One camp argues that the upside from shale oil supplies will be more than enough to meet demand growth. The other disputes that, saying the likely impact from shale is being exaggerated.

Victor Shum at IHS Purvin and Gertz says that while prices need to be high enough to bring on new production, shale oil “changes the supply side of the equation”.

“In 2020 we expect the world to be awash with oil as a result of booming supply and sluggish demand,” said Julian Jessop of Capital Economics, also a bear on oil prices in the short-term.

Among seven analysts predicting sub-$100 a barrel, Capital is the most bearish at just $70, which would be substantially lower in 2012 prices allowing for inflation by 2020.

The top bull is Barclays Capital, $24 clear of its nearest rival with a $184 forecast for Brent. Barcap heads a group of six that put Brent at $140 a barrel or higher.

Bernstein Research sees Brent at $158 a barrel by 2020, forecasting that over the next three years shale oil will reach just 3.2 percent of global supply from 1.5 percent now.

“While it is true that shale oil has reinvigorated U.S. production, this new supply remains too small, even when combined with Canadian oil sands, to flood the global market,” Bernstein said in the most substantial piece of research yet published on the issue.

JBC Energy’s Michael Dei-Michei who forecasts Brent at $148.20, is also sceptical that shale will do enough to push down prices.

“While the boom in U.S. and Canadian oil production is a great thing for North America, we have seen that the rest of the non-OPEC countries have clearly underperformed, and output is lower than expected,” he said, citing Brazil and Kazakhstan as examples.

For now, the market is on the side of the bears.

Volumes are thin, but the Brent market is already trading out to December 2019 where it is currently priced at $91 a barrel, That’s roughly the estimate many give for the commercial cost of production for marginal output at new frontiers like shale and ultra deepwater.

It’s also in line with the change in forward pricing that occurred over the past 18 months as traders became aware of the rise in U.S. shale oil output.

From close to parity with $105 spot Brent in mid-2011, 5-year forward prices have fallen, barely reacting even when spot prices hit $125 this spring. 5-year forward crude is now valued just below $90 a barrel.

reuters



9 Comments on "Does U.S. shale mean cheap global oil by 2020?"

  1. econ101 on Wed, 31st Oct 2012 10:04 pm 

    The new supply is growing

  2. TIKIMAN on Wed, 31st Oct 2012 10:26 pm 

    “Does U.S. shale mean cheap global oil by 2020?”

    What a stupid fucking question.

    The only reason we are now going to shale is because it’s not worth it unless prices are at $100+ a barrel.

  3. GregT on Wed, 31st Oct 2012 11:53 pm 

    “What a stupid fucking question.”

    Blunt, and to the point.

    “Peak oilers have become almost extinct, destroyed by the arrival of new technologies with the U.S. leading the oil supply change,” said David Hufton of oil brokerage PVM.”

    “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” Upton Sinclair

  4. Harquebus on Thu, 1st Nov 2012 12:42 am 

    EROEI mates, EROEI.

  5. DC on Thu, 1st Nov 2012 1:15 am 

    How can Shale make gas ‘cheap’? The best we can ever expect of this low-grade not-oil is to slow the rate of over-all depletion (somewhat). And if demand destruction does drop price the price of oil, then all those toxic tar-sands, shale and frak operations immediately begin to lose money.

  6. James A. Hellams on Thu, 1st Nov 2012 1:17 am 

    Peak oil is NOT dead. It is still very much alive and well folks.

    In the reading of this article, ONLY price per barrel is mentioned. This says nothing about the ENERGY COSTS to extract all that oil.

    In leaving out the energy costs, this article says nothing about the geologic constraints imposed by nature. NO amount of money poured down the well hole is ever going to change the rule of nature.

    This article COMPLETELY ignores EROEI (energy return on energy investment). AT some point in the production, refining, and distribution of the oil (of which all of these involve the expenditure of energy) you WILL reach a point where you are expending more energy than the oil in the ground is worth. You cannot ignore this reality. This is the point where ALL activity at the well ceases, and is TOTALLY useless.

    As for the world being awash in oil, don’t count on it.

    Even in this article, the author admits that production in other countries is on the way down. The net result is that any energy gain from the well activity in North America is being offset by losses in the rest of the world.

    Another factor that is not considered in this article is how many billions of barrels of oil are consumed each year; and how many billions of barrels of oil are left in the ground. The reader is given the false impression that the oil is inexhaustible, which is totally wrong.

  7. BillT on Thu, 1st Nov 2012 1:59 am 

    I suspect that when the Age of Petroleum ends, there will still be billions of barrels of oil in the ground, and there they will stay. As mentioned above, EROEI and the economy will end oil production long before it is all used up.

  8. DMyers on Thu, 1st Nov 2012 2:18 am 

    Wake up! Shale oil ain’t gonna cut it. The article is crammed full of numbers that don’t add up. How about the 2020 forecast of 118 a barrel? I say it’s gonna be 118K a barrel due to hyperinflation. The same point goes for the futures.

    It’s going to cost a lot more than they’re saying, for any number of reasons.

  9. Laci on Thu, 1st Nov 2012 2:56 pm 

    I predict oil will not be much higher than $110 a barrel in today’s currency. Reason is that economy cannot sustain that price for a prolonged period. It also does not matter how much production will increase, prices cannot go much bellow that in the long term, because break-even price for many new suplies is in the $100 range in today’s dollars.

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