Oil Shortage Coming

Jim Brown
 
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Geophysicist Jiles van den Beukel, warned last week that oil supplies will fall below demand from 2018-2020. Source "The key factor in supply reduction is that cost cutting is leading to higher decline rates of mature conventional fields. So far this decline has been compensated by new oil field development, but the severe investment cuts will gradually reduce the flow of 'new oil' to a mere trickle by the early 2020s. Meanwhile demand is still growing" at the rate of 1.5 mbpd per year.

He said much of the oil debate has been on how fast the shale fields in the U.S. grew and then declined, now down 1.0 mbpd from the 2015 high. However, he believes the 50 mbpd production from mature conventional fields is a bigger problem. "Small changes in the decline rate of these fields result in large changes for oil supply in the future."

Rystad Energy calculated the decline rates for these mature non-OPEC fields. In 2016 they are expected to decline by 6.2%, 2017 5.8% and 2018 5.7%. The average actual decline rate from 2010-2014 was 3%. Without any new development activity, which includes stimulation, gas reinjection, water floods, etc, it would have been 8% to 9%. The problem in this environment is that those enhanced production techniques are expensive and at $45 oil producers are cutting back on those added expenses. The impact of a cutback in enhanced production techniques will be long term.

In absolute decline rates this means 2016 production from mature fields will be in the 3.3 mbpd range on total global production over 90 mbpd. Offsetting this decline in 2016 will be about 3.0 mbpd of new production coming online that was sanctioned in the 2010-2014 period. It takes 5-7 years from discovery to commercial production on new discoveries. Production coming online in 2016-2017 was funded back in 2010-2011. With more than $1 trillion in new projects cancelled or postponed over the last two years we are going to have a major drop in new production in the 2018-2022 range. While production can peak and valley in cycles, field decline is permanent. That 3.3 mbpd decline is expected to grow to 4.5 mbpd by 2020 as a result of a cut in investment in enhanced production techniques.

If demand is growing by 1.5 mbpd and mature fields are declining by 3-4 mbpd, by the end of the decade there will be a shortage of oil that could last for several years. Fortunately, once prices begin to rise as inventories are decreased those cancelled projects will be brought back to the table and 5-7 years later we will see an increase in production. Unfortunately, during that time demand will continue to grow and production will continue to decline because of that project lag time. The bottom line is that oil is going to become very expensive in the 2018-2022 period.

As we saw in 2007-2008 when gasoline prices were over $4, demand dropped significantly. This is price rationing. At the current $2.25 per gallon in the USA, consumers are buying bigger cars and SUVs and driving more. When prices catapult back over $4 in 2018-2019, demand will slow and the cycle will repeat. High prices cause lower demand and higher production. High production creates lower prices and demand rebounds. It has been this way for 70 years and it will continue until we can no longer produce enough oil to meet future demand. There is a point where this will happen and it is called Peak Oil. We came close in 2008 but the financial crisis crushed demand and allowed production to catch up again. Sooner or later, we will run out of new discoveries and the old fields will not be able to keep pace with future demand.

Somewhere in the next ten years India will become the growth engine China was in the last decade. The Oxford Institute for Energy Studies pointed out that India's oil demand growth doubled from 150,000 bpd to 300,000 bpd as the population of 1.3 billion is starting to become more mobile. Since 2000 Indian ownership of a motorized vehicle has risen from 38 per 1,000 people to 144 per 1,000 in 2014. Ownership rose from 117 to 144 from 2013 to 2014 alone. The growth path is exploding higher and oil demand is exploding with it. China already produces more vehicles than the USA at 20 million compared to 17 million. India has the potential to be even stronger than China as their growth spurt continues to surge.

Enjoy your cheap gasoline while you can because higher prices are coming and they may be around for a long time.


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  Active Rigs

Active drilling rigs rose +10 to 431 for the week ended on Friday 7/1. That is the largest weekly gain since August 2015. Oil rigs rose +11 for the week to 341. Active gas rigs fell -1 to 89. Active rigs have now declined -1,500 since the high of 1,931 in September 2014. Active offshore rigs fell -2 to 19 and a low for this cycle after peaking at 61 in 2014.


Oil Inventories Week Ended 6/24/16

Crude inventories fell -4.1 million barrels to 526.6 million. The historic high at 543.4 million was on April 29th.

Refinery utilization surged from 91.3% to 93.0% ahead of the July 4th driving weekend.

U.S. production declined -55,000 bpd to 8.622 mbpd. That is a decline of 988,000 bpd from the peak in 2015.

Cushing inventories fell 1.0 million barrels to 64.2 million.

Gasoline inventories rose +1.4 million barrels to 239.0 million.

Distillate inventories fell -1.8 million barrels to 150.5 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below, green represents a recent high and yellow a recent low.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

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