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We have maintained a very bullish outlook for the oil market. Essentially, we forecast that global oil demand will see an eventual (and full) rebound from negative pandemic-induced effects, but that non-OPEC oil supply will not see a commensurate recovery. Let us talk about the “why.”
Back in 2019 (so, prior to impacts linked to the pandemic), we were publishing work suggesting that US crude oil production would likely decline post-2020. The analyses were admittedly greeted with a great deal of skepticism, but nevertheless centered on a key finding in data showing that US crude oil production was growing, but at a slower-and-slower-and-slower rate. In mathematical terms, this is referred to as a negative second derivative. This slower-and-slower-and-slower growth pattern related back to the very short-term nature of shale oil output.
Unlike a shale natural gas well, shale oil wells have a comparatively short life. It stems from the physics of pumping a liquid through the equivalent of synthetic sandstone. While a conventional oil well may produce for 30 or 40 or 50 years (in some case even longer), a shale oil well’s life is about five years.
The inordinate focus that has been evident on this particular source of oil supply relates to the fact that for the past 10 years, almost 100 percent of all non-OPEC oil growth came from US shale. This is a startling conclusion for most market watchers, given that crude oil prices averaged over $100 per barrel in four of those 10 years.
For as much hype as there has been about windmills and electric vehicles, the green technologies cannot stave off oil’s bullish fundamentals.
Michael Rothman
An additional consideration about non-OPEC oil supply not seeing a commensurate rebound vis-a-vis global oil demand is the fact that about $2.2 trillion has been cut from global oil production budgets since the high-water mark in 2014. The thing about oil supply is that the industry (collectively) always has to find and develop new sources to offset declines from existing output.
Over the past 20 years, global oil demand has actually outrun total non-OPEC supply gains. Leaving out data for 2020 (simply because figures are distorted from pandemic-related effects), world oil demand has grown by 25.3 million barrels per day. Total non-OPEC supply (even allowing for biofuel gains) totaled a wee more than 19 million barrels per day over the same 20 years. The global oil balance had to be met by the OPEC countries, which saw their spare oil production capacity shrink (pre-pandemic).
In concluding that US shale oil production is in its twilight phase and that the rest of the non-OPEC supply will be challenged by the aforementioned cut in production budgets, we also have to consider the potential drag on upstream efforts that has emerged from anti-carbon pressures. This looks to put a great deal of bullish pressure on OPEC’s output capacity, which we forecast will cause a further paring down of oil inventories (they already shrunk by 370 million barrels since July 2020 — the largest draw in history) and upward pressure on crude prices. For as much hype as there has been about windmills and electric vehicles, the green technologies cannot stave off oil’s bullish fundamentals.
• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986