I have become an avid reader of the International Energy Agency Oil Market Report. A”free” synopsis is published mid month with the full report and data tables made public at the end of the month. Here are the bullets from the report summary published on 10th July:
- Crude oil prices fell to their lowest in nearly three months in early July, pressured by ever rising supply while financial turmoil in Greece and China unsettled world markets. At the time of writing, Brent was around $59/bbl and US WTI at $53.10/bbl.
- Global oil demand growth is forecast to slow to 1.2 mb/d in 2016, from an average 1.4 mb/d this year, with strong consumption expected in non-OECD Asia. World oil demand growth appears to have peaked in 1Q15 at 1.8 mb/d and will continue to ease throughout the rest of this year and into next as temporary support fades.
- Global oil supply surged by 550 kb/d in June, on higher output from OPEC and non-OPEC. At 96.6 mb/d, world oil production gained an impressive 3.1 mb/d on 2014, of which OPEC crude and NGLs accounted for 60%. Non-OPEC supply growth is expected to grind to a halt in 2016, as lower oil prices and spending cuts take a toll.
- OPEC crude supply rose by 340 kb/d in June to 31.7 mb/d, a three-year high, led by record high output from Iraq, Saudi Arabia and the UAE. OPEC output stood 1.5 mb/d above the previous year. The ‘call on OPEC crude and stock change’ for 2016 is forecast to rise by 1 mb/d, to 30.3 mb/d.
- OECD industry inventories hit a record 2 876 mb in May, up by a steep 38.0 mb. Product holdings led the build and by end-month covered 30.7 days of forward demand. Global supply and demand balances suggest that the rate of global stock builds quickened rapidly to an astonishing 3.3 mb/d during 2Q15.
- Robust margins spurred stronger-than-expected OECD refinery runs, lifting 2Q15 global throughput estimates to 78.7 mb/d. Global refinery throughputs are forecast to increase by a further 0.7 mb/d in 3Q15, with annual gains shifting to the non-OECD. New capacity start-ups in 2015 and 2016 will put margins under pressure.
The title of this post, “The bottom of the market may still be ahead”, is the last line of the July IEA OMR summary. Those companies and investors hoping for an early end to this low price crisis may be disappointed. Global supply was up again in June by 550,000 bpd. Demand growth looks set to slow. Inventories are at record levels. And not surprisingly prices have once again yielded to the gravity of glut and have fallen below $60 / bbl. To add insult to injury US oil rig count has risen these last two weeks and UK North Sea oil production looks set to rise in the years ahead.
The US oil rig count has fallen every week since December 2014, that is until two weeks ago when it rose for the first time in 7 months a feat repeated last Friday.
The US oil rig count has risen over the last two weeks by a total of 17 units. So what is going on? Why have the shale producers not all gone bankrupt as some industry watchers forecast. An interesting article in Breitbart, posted by Roger Andrews in this week’s Blowout, gives some clues.
The U.S. “fully burdened exploration and production “break-even” cost is now $51 per barrel, and falling fast. Furthermore, with hundreds of American oil companies having already paid the exploration lease acquisition costs to accumulate tens of thousands of drilling sites, the production-only break-even cost for positive cash-flow is about $29 a barrel. After tacking on a 9 percent profit, U.S. domestic oil companies are now incentivized to produce domestic oil any time the price is above $32 a barrel.
The operating cost base for drilling and producing shale oil has followed the oil price down. If these figures from Breitbart are anywhere close to correct then many OPEC members should be extremely concerned. Can they run their social services on $30 per barrel?
UK Oil Production to Increase
Not only do the oil companies and the oil price have to contend with robust US production but there is a prospect of UK oil production increasing for the first time since the year 2000. The forecast scenario below is from Derek Louden who provides a tremendous overview of UK oil production in this presentation.
UK oil production has a historic decline rate of about 9% per annum. It was always the case that when production declined so far that it would become easier to reverse basin decline. For example, when production stood at 2.9 Mbpd, 261,000 bpd new production capacity was required every year to replace declines. Now that production is closer to 0.8 Mbpd, 72,000 bpd new capacity will do the job.
The record high price of recent years has led to record levels of investment that are only now working through the system with several major new field developments due to come on line in the next couple of years. Derek Louden lists all new developments on pages 42 and 43 of his report. The big ones are: Schiehallion redevelopment, Clair phase 2, Kraken and Mariner. If all goes according to plan then UK production will rise before falling again before the end of the decade.
One of the big surprises of the IEA OMR is the record crude oil and products inventory levels that they do not fully understand. In the past I have never managed to make much sense of inventory changes and it is hence a variable that I have not followed. It is perhaps time to put that right. The chart shows the development of stock levels in the USA based on EIA data.
In a recent comment Jim suggested that the flood of LTO may produce a flood of propane and NGL that currently has no where to go but storage. In the USA this does seem to be a part of but not the whole story. It is a rise in crude oil stocks that underpins the recent surge in US inventory.
The oil companies and service companies have already made deep spending cuts with substantial redundancies. Nevertheless, the momentum built in the last 5 years continues to feed through to higher production levels. Many companies will have been hoping for signs of a robust recovery in price by now, hanging tough to retain staff for when the upturn comes. I suspect that over the next 6 months we will see a second wave of cuts. Things are indeed already austere here in Aberdeen.
One thing we seem to have heard little about so far is austerity within OPEC. There seemed to be solidarity for the current strategy at their June meeting. I wonder how much longer this will last?