There is a temptation to attribute the recent rise in oil prices to just the uncertainty of the political purge that we have seen in Saudi Arabia, but if you think that you are missing the larger point. There is a reason why we have seen oil prices hit a two-and-a half year high and a reason why they are up from a of 26.05 in 2016 to a high yesterday 57.69. It is because the crash in oil prices caused one of the biggest oil investment pull backs in history and at a time when low oil prices spurred demand and which now is at one of the fastest growth rates and fastest global growth rate since 2012 leading to the fastest drain in global oil and petroleum supply drains in history. The Energy Information Administration (EIA) reduced their outlook for U.S. shale and OPEC put to rest the myth of “peak demand” as the oil supply drain is speaking volumes.
The American Petroleum Institute added to that record supply drain by reporting that U.S. crude supply fell for the eighth week in a row by 1.56 million barrels. They also said the supply deficit in reporting that distillates supply fell by 3.13 million barrels. They say gasoline supply did rise by 720,000 barrels but that followed a API 7 million barrel drop a week ago.
Shale oil producers continue to disappoint and while we did see the prolific Permian Basin add production, in the other basin production is flat to declining. Why well capitalized firms can lock in a hedge, yet smaller firms would be hedging in losses at this point, but may do so just to get banks to lend them capital. This caused the EIA to once again lower its outlook for U.S. shale production in yesterday’s Short-Term Energy Outlook.
For the second month in a row, the EIA lowered its estimate for production to a growth of just 81,000 barrels a day in November, putting total shale output at just 6.12 million barrels a day next month. Many in the industry think the EIA is still overestimating output and based on the big drops, week after week in U.S. inventory, it seems that they probably are. In fact, in some basins shale production is going into a decline. Estimates are that shale oil producers will have to double their capital spending to regrow output by a million barrels a day, that would be almost impossible unless oil stabilizes in the $60 a barrel handle. Even at that they can’t match OPEC production costs and growing global oil demand growth.
OPEC says forget about peak demand at least until 2030. The Financial Times reported that OPEC raised its forecast for oil demand in the coming decades despite a global push in energy policies that promotes cleaner fuels and a rise in technologies such as electric cars. OPEC says that world consumption will rise from 95.4m barrels a day in 2016 to 102.3m b/d in 2022, which is an upward revision of almost 2.3m b/d, the cartel said on Tuesday. Longer term oil demand has been revised upward by 1.7m b/d to 111.1m b/d by 2040.
Still OPEC believes that shale can come back. OPEC says that the outlook for non-OPEC liquids growth has “changed quite considerably due to the U.S. tight oil sector’s resilience and ability to bounce back.”