Crude Economics
IEA Predicts a Bad Two Years for Shale, Prices Rebound

Oil prices are mounting a comeback today, riding the release of the International Energy Agency’s medium-term outlook to post multiple-dollar gains. Brent crude is up nearly 5 percent, and America’s West Texas Intermediate benchmark jumped $1.79—over a 6 percent increase. It’s a rare rally in a market that for the past twenty months has seen prices tumble from more than $110 per barrel down eventually to below $30. The rebound comes on the news that the IEA expects American oil production could drop by 600,000 barrels per day (bpd) this year and by a further 200,000 bpd in 2017. Reuters reports:

The markets began the week with a rebound in Asian trade, reacting to Friday’s U.S. rig count data, which showed the number of oil drilling rigs in operation falling to a December 2009 low after nine straight weeks of cuts. Prices got a further boost after the International Energy Agency, the world’s oil consumer body, said U.S. shale oil production could fall by 600,000 barrels per day (bpd) this year and another 200,000 bpd in 2017.

But the report is far from fodder for oil market bulls. Rather, it’s just the opposite: As the IEA says, “it is hard to see oil prices recovering significantly in the short term,” pointing to the reality that crude supplies appear poised to outstrip demand into next year. According to the report, “[o]nly in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices.” And while this year and next aren’t expected to be kind to U.S. producers, the IEA sees big things ahead for American oil output. According to the report, “. . .a gradual recovery in oil prices, working in step with further improvements in operational efficiencies and cost cutting” will in time prompt “a gradual recovery” for U.S. output. More:

Anybody who believes that we have seen the last of rising LTO production in the United States should think again; by the end of our forecast in 2021, total US liquids production will have increased by a net 1.3 mb/d compared to 2015.

Russia and Saudi Arabia proposed freezing production at current levels last week, but that agreement didn’t have anywhere near the kind of positive effect on the oil market that this week’s IEA report is having. U.S. production is a big reason for that, because due to the relatively short life-cycle of shale operations, American firms will be able quickly to grab any share of the global market that petrostates might vacate. In fact, companies have been busy preparing for the day when prices increase by drilling but not yet fracking wells until it’s once again profitable to do so (creating what’s come to be known as a “fracklog“).

But if U.S. producers are able to play spoiler to proposals for global supply reduction, the IEA’s prediction for their decline this year and next is nevertheless enough to kick off a price rebound, as we’ve seen in trading today. That the IEA expects the U.S. to hit record production levels in 2021, then, ought to be keeping oil ministers in petrostates around the world awake at night.

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