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Page added on February 7, 2020

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Peak Shale Will Send Oil Prices Sky High

Production

Much of the cheap oil has been produced, and the oil industry is increasingly relying on costly reserves. While the world is awash in supply right now, the market may begin to tighten up in the next few years, forcing prices higher.

But the global economy will begin to sputter as a result of higher crude prices. “The current economic system cannot sustain oil prices above $100 a barrel, and engage in genuine growth in the real economy for very long,” warned the report, authored by Dr. Simon Michaux and published by the Geological Survey of Finland. “Alternatively, producers cannot sustain oil prices as low as $45 a barrel and still make a profit.”

That’s especially true of U.S. shale. Wall Street is taking an increasingly critical view of shale, an industry which has never been cash flow positive for any meaningful period of time. As investors, banks and other forms of finance distance themselves from unprofitable shale drilling, the rate of bankruptcies is on the rise. Clearly, at least a portion of the global oil industry needs much higher prices in order to sustain growth. The production gains of the past decade were possible via cheap credit and an overcapitalized industry in North Dakota and Texas.

U.S. shale could be nearing a peak, or, at least a plateau. There isn’t a consensus on this, by any means, but a growing number of analysts and even some within the industry are eyeing such a possibility. For example, John Hess, CEO of Hess Corp., recently said that production in the Bakken could peak within the next two years and the Permian will peak in the mid-2020s. But others have said that the Permian peak may arrive sooner. Steep decline rates mean that any slowdown in the pace of drilling will quickly impact production.

The financial stress sweeping across the shale industry may bring forward the peak in shale production. But the precise date is not all that important. The problem is that the plateauing of U.S. shale, and the resulting increasing in prices, could spell trouble for the global economy. Michaux, author of the Geological Survey of Finland, cited the 2008-2009 global financial crisis as an example. Saudi oil production stalled out in the years preceding the crisis, precipitating a massive price spike in 2008, which contributed to the financial market meltdown.

The report – which was recently analyzed in an excellent article by Vice – notes that about 70 percent of the world’s oil supply comes from fields discovered before 1970, and the bulk of that comes from 10 to 20 enormous fields. The pace of discoveries has slowed dramatically in the past decade. In fact, conventional oil production largely plateaued in 2005. Since then, U.S. shale and Canadian oil sands accounted for most of the new supply. But as the number of bankruptcies in the shale patch reveal, the new forms of oil are more costly to produce.

The report concedes that the oil market is currently oversupplied. But Michaux takes a dim view of peak oil demand, instead predicting that demand growth will once again begin to exceed supply growth, putting a lot of pressure on spare capacity, which will shrink to ever-smaller levels. “Oil demand is still growing by ~1mbd every year, and no central scenarios that have been recently assessed see oil demand peaking before 2040,” Michaux warns.

Roughly 81 percent of existing production is already in decline. Given that the average decline rate bounces around between 5 to 7 percent per year – which translates to lost production of about 3 to 4.5 million barrels per day (mb/d) each year – the world will need to come up with an extra 40 mb/d just to keep output flat, Michaux predicts.

In other words, the market will need the equivalent of four additional Saudi Arabia’s just to replace depleted fields by 2040. But, as previously mentioned, the major source of supply growth in the past decade – U.S. shale – is running on fumes, and needs higher prices in order to grow.

To be clear, this flies in the face of lot of conventional wisdom in the industry (newfound conventional wisdom, it should be noted). For instance, Suncor Energy just announced a C$2.8 billion write-down on its newest oil sands production facility, due to the expectation of low long-term oil prices. “When the price went down in 2014, I don’t think people realized that we literally were going to go (down) year over year over year,” Suncor CEO Mark Little said Thursday on a conference call. “We’re literally bouncing around, but trading sideways. When we look at the markets we think, ‘hey we’re sitting in this same range going forward for foreseeable future.’”

Many industry analysts see oil prices remaining “lower for longer,” or even permanently lower. The prospect of peak demand plays into this, and the shift away from fossil fuels would relieve pressure on the global economy and prevent oil prices from spiking.

But Simon Michaux wrote in the Geological Survey of Finland that the energy transition may not be fast enough. As slowing supply growth runs into ongoing increases in demand, the result could be much higher prices in the years ahead, and a major risk to the global economy. “Money supply and debt have grown faster than the real economy. Debt saturation and paralysis is now a very real risk, requiring a global scale reset,” Michaux warned. That’s a nice way of saying that an oil price spike could cause another financial crisis.

By Nick Cunningham of Oilprice.com



10 Comments on "Peak Shale Will Send Oil Prices Sky High"

  1. makati1 on Fri, 7th Feb 2020 10:27 pm 

    What a pile of bullshit from an oily source! More oily stuff lowers the price, not raises it. But then, the stupid oily “investors” don’t want to see reality. So be it! The coming pain is well deserved!

  2. Davy on Sat, 8th Feb 2020 3:29 am 

    “Gasmaggedon” Sweeps Over Global Energy Market”
    https://tinyurl.com/t464ugl oil price

    “China’s state-owned gas importers are considering declaring force majeure on LNG imports, which would amplify the turmoil in global gas markets. LNG prices have already plunged to their lowest levels in a decade in Asia as the ramp up of supply in 2019 came at a time when demand has slowed. That was true before the outbreak of the coronavirus. But the quarantine of around 50 million people and the shutdown of huge swathes of the Chinese economy has sent shockwaves through commodity markets. Shipments of oil and gas are backing up at Chinese ports, which is creating ripple effects across the world. Now, Chinese state-owned CNOOC is considering declaring force majeure on its LNG import commitments, according to the FT. Sinopec and CNPC are also apparently considering the move…The investment bank calls the U.S. Midwest power sector is the “true market of last resort,” which means that U.S. gas prices have to fall to such low depths that coal-fired power plants are forced offline in their last redoubt – the Midwest. “We believe the US cannot sustain reduced LNG exports this summer,” Bank of America warned. “Therefore, US natural gas prices might have to go low enough to stimulate sufficient Midwest power sector natural gas demand to balance the entire global gas market.”

  3. Anonymous on Sat, 8th Feb 2020 11:36 am 

    That report is dedicated to M. King Hubbard. It’s a typical old peak oil report from a guy who has been wrong for ten years now and totally missed the shale phenomenon. There is a reason why TOD and ASPO shut down (terminal foolish face).

    As for Nick Cunningham, he just writes the same “shale is over” article every few months. Gets old.

  4. Anonymous on Sat, 8th Feb 2020 11:42 am 

    Davy, natgas will be interesting to watch. I think at $1.85 that a lot of the damage is already priced in. There’s actually limits to how much power burn can switch. But you’re starting to see production drop in response to the price signal.

    Of course prices are hard to predict. But my guess is not more big drama (one handle for price is enough drama, but not breaking 1.50 or other craziness). Should slog around like that until summer when we gradually work back into the low 2s.

    If you look at storage, it’s slightly high, but still well within the 5 year band. Not crazy. Price is responding to more of the production/demand mismatch now. But at least storage is not a problem. More of a long gradual problem than the sudden, short pain of 2012 and 2016.

    In any case, these weather gyrations will happen every few years. And can go to the upside also. The main thing is the long term trend (more natgas at cheaper prices).

    China flu is temporary issue also. Probably much less impact than a big global recession for instance.

  5. Davy on Sat, 8th Feb 2020 11:48 am 

    “China flu is temporary issue also. Probably much less impact than a big global recession for instance.”

    Nony, I think it is possible one might create the other if China can’t reboot properly. IOW virus creates global recession or depression

  6. Richard Guenette on Sat, 8th Feb 2020 2:49 pm 

    Bollocks!!!!

  7. Richard Guunette on Sat, 8th Feb 2020 2:52 pm 

    JuanPee is a Faggot

  8. world supremacist muzzies lovers united on Sat, 8th Feb 2020 2:58 pm 

    all supertards are highly intelligent speak perfect high english and die hard muzzies lovers
    most are libs who are filthy rich who buy all lib urns in store shelves
    now they’re going after the only thing i coud afford lib orbs

    stop it guys please

  9. Richard Guunette on Sat, 8th Feb 2020 3:28 pm 

    Vacate the place juanPee you pathetic excuse for a human

  10. makati1 on Sat, 8th Feb 2020 5:27 pm 

    When you are flaring a product to get rid of it because the price is too low to capture and sell it at a profit, you know the shit hitting the fan moment is not far away. Be patient. The financial collapse is near.

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