Daily Energy Market Analysis
By Phil Flynn
Believe it or not the globe is headed for an oil shortage. I know many find that hard to believe, especially in this shale-crazed world where there is the belief that shale oil will fill all voids, even as investment in oil exploration falls to the lowest level since the 1940s.
I am not the only one thinking this way. Dow Jones reported Amin Nasser, the chief executive of Saudi Arabian Oil Co., or Saudi Aramco, is predicting that the world is heading for an oil-supply shortage that booming U.S. shale production can’t prevent. He pointed out that in the past three years there has been a major reduction in investments in long-term crude-petroleum exploration and development projects. “The long-term situation of oil supplies…is becoming worrying,” Nasser said at the World Petroleum Congress–a large oil-industry conference in Istanbul. He added, “the dearth of investment now would lead to fewer barrels in future, even with shale production.” He said the world needs 20 million barrels a day of new production in the next five years to meet demand. “Investments in smaller increments, such as shale oil, will just not cut it,” Nasser said, according to Dow Jones.
Dow Jones also reported that Nasser’s concerns about oil supplies falling short are shared by the International Energy Agency, a Paris group that advises industrialized oil-consuming countries. But others such as Exxon Mobil Corp. have said technology, better methods, and new, recent oil discoveries will keep supplies plentiful for the foreseeable future. Bloomberg says that Saudi Aramco, which plans what could be the world’s biggest initial public offering, will invest more than $300 billion during the next decade to maintain its spare oil-production capacity and explore for more natural gas, according to Nasser.
Yet, crude oil is still struggling today as a rising U.S. oil rig count offset news about OPEC nations working bywords putting a cap on Libyan and Nigerian oil output. It seems that there will be a meeting that will decide about a cap for countries without an OPEC quota and that may send a signal to the market that indeed there will be a cap on global OPEC oil output. Yet, we have rising U.S. oil production and the fact that the oil rig count rose yet again by 12 rigs, 7 for oil and 5 rigs for natural gas.
But are the rig counts telling the whole story? The number of active oil and gas rigs in the United States rose again this week, this time by 12, resuming what was the US shale patch’s impressive run of 23 weeks of steady gains, prior to last week’s decrease of a single rigs. But if you look at the breakdown it is not as impressive on the shale front. Oilprice.com pointed out even as we added 7 oil rigs last week, after dropping by 2 the week before, we saw that Alaska added back 4 rigs this week that they lost recently to routine summer maintenance. Put another way, those four Alaskan rigs do not frack, and are merely used to manage the terminal decline of aging Alaskan oil fields. That leaves a net three new (productive) oil rigs added this week, but where?
The Gulf of Mexico did not add any rigs and stayed static at 21 rigs, so no new off-shore rigs added there. North Dakota shale added no new rigs staying steady at 52, so no new rigs added in the Bakken shale fields. In the basin breakout, we see that no new rigs added in the Eagle Ford shale fields. There was a loss of one rig this week in the Permian basin, a warning sign about the overall health of the shale play. So, in the three largest LTO shale basins, and the Gulf of Mexico there was a loss of one rig. Oilprice.com points out that the rigs were added in the Woodford basin in Oklahoma. Was this due to an extremely low break-even there making mid to low $40s WTI profitable, or maybe because lease requiremensuressure that wells are drilled, even if one must postpone completions until the prices rise? Aren’t drilled but uncompleted wells also rising? Oilprice.com says that, “it appears the U.S. shale market is reaching an inflection point in the mid-40s. With no gains in rigs for two weeks now in the largest basins, maybe the market is speaking? Will anybody listen?”
We also get Fed speak this week. Fed Chair Janet Yellen will be testifying and the market is pricing in more hawkish news on the rate front. Dollar strength may be a bit of a headwind.