As I expected, oil prices have remained relatively range bound in the mid-$50 range. I continue to expect this range to hold for the next few weeks.
At these prices, many are concerned that increased drilling for shale oil production will offset the recent production cutbacks and force oil prices back down again. While that might happen, I expect that it won’t.
Looking at oil production data in the US Energy Information Administration’s “Annual Energy Outlook 2017” report, note in the reference case that US total oil production from the lower 48 states is forecast to be relatively flat from 2018 to 2050. In 2018, the forecast volume is 9.32 million barrels per day. In 2029, forecast production hits a peak at 10.55 million barrels per day, and in 2050 forecast production is 9.86 million barrels per day. Oil wellhead prices are forecast to increase from $49.90 per barrel in 2017 to $72.18 in 2020 and to over a $100 by 2036. All prices are in 2016 US dollars. The key point is that even though prices are rising quickly, oil production forecasts do not rise significantly above 10 million barrels per day.
I am also closely watching “U.S. crude oil and liquid fuels production” data forecasts from US Energy Information Administration’s “Short Term Energy Outlook” monthly reports. Crude oil and liquid fuels production includes crude oil, natural gas plant liquids, ethanol, and biodiesel.
The January 2017 “Short Term Energy Outlook” report contained the following total production data, both historical and forecasts, in millions of barrels per day:
- December 2016: 13.500
- December 2017: 14.276
- December 2018: 14.810
2017 shows an increase of about 5.75 percent, and 2018 shows an increase of about 3.74 percent.
In February’s monthly report, the historical and forecast data were revised as follows:
- December 2016: 13.443
- December 2017: 14.382
- December 2018: 15.253
2017 shows an increase of about 6.98 percent, and 2018 shows an increase of about 6.06 percent.
It’s important to note that the percentage increases are increases in the average production during the month of December compared to average daily production during the prior December. This is in contrast to the average daily production increase throughout the year that is forecast to be much less. For example, in the January report, the forecast annual average daily growth in crude only, excluding natural gas plant liquids, ethanol, and biodiesel, for 2017 was 1.3 percent and for 2018, 3.3 percent. In the February report, the data was revised for 2017 at 1.1 percent growth, and 2018, 6.1 percent.
As more “Short Term Energy Outlooks” are released, I plan to track the changes to both historical and forecast production data. Will production forecasts continue to increase and, if so, more rapidly than previously thought?
On January 19, 2017, the Financial Times article “‘Permania’ grips the US shale oil industry” (subscription required) revealed estimated breakeven oil prices for Permian basin producers. Most participants have an average breakeven price of between $40 and $60 dollar per barrel. The most productive assets have breakeven prices below $40 per barrel. The least productive assets, however, require much higher prices, up to $100 per barrel for Apache, for example. I expect that companies are focused on their more productive assets now when prices are in the mid $50s. A key point, though, is that oil prices will need to exceed $60 for all Permian basin assets to be developed.
The following quote comes from the Wall Street Journal February 16 article “Oil Gains on Possible Extension to Production Cuts” (subscription required):
On Thursday, Reuters reported that OPEC sources said the cartel could extend the six-month deal to cut supply, or make more severe cuts, if oil stocks don’t drop by around 300 million barrels.
Because US production is not forecast to exceed much beyond 10 million barrels per day in the near term and because current world production is likely unsustainable at prices below $60 per barrel, Saudi Arabia will probably play a waiting game. It will likely continue to keep or deepen current cuts until such time as more OPEC production is desired.
Forecasts are always wrong—it’s just a question of how wrong. It is important to keep monitoring information and adjusting one’s forecasts.