The Fuse

Caution Over Optimism on Shale Production

by Matt Piotrowski | March 05, 2018

Headlines are once again touting the enormous potential of U.S. shale crude oil. The International Energy Agency (IEA) said in its latest-five year outlook, released Monday, that shale growth should be able to meet most oil demand increases in the next few years. Output in the Permian is expected to double by 2023, and consultancy Wood Mackenzie estimates that the United States will export approximately 4 million barrels per day (Mbd) by the middle of the next decade, putting the country on par with major exporters such as Canada and Iraq.

The benefits from the rapid rise in shale, including decreased volatility, lower prices for consumers, and a reduction in oil imports, are encouraging. Moreover, along with the United States, other non-OPEC producers, such as Brazil, Canada, and Norway, will see increases in the coming years, mitigating the effects of OPEC’s ongoing supply cuts and outages from geopolitical events, particularly those in Venezuela.

The sustained rise in demand and the eventual decline in shale growth will coincide with limited global upstream investment.

Despite the promising outlook, concerns remain over shale’s longer-term impact. Circumstances in the oil markets are expected to change, perhaps dramatically, early next decade. While U.S. production is expected to grow by a massive 2.5 Mbd in 2018-19, increases will thereafter slow considerably. Output should rise by only 100,000 barrels per day in 2023.

As U.S. production slows, demand is forecast to keep rising at a strong pace, even with continued penetration of alternative fuel vehicles. The IEA, for instance, sees global demand growing by an average of 1.2 Mbd per year through 2023, reaching 105 Mbd. Emerging markets will still dominate demand growth, and China’s net crude oil imports will be double those in the United States in five years, giving the Asian country increasing influence on global prices.

The sustained rise in demand and the eventual decline in shale growth will coincide with limited global upstream investment, a lingering effect from the price downturn of 2014-16. Investment fell by 25 percent in both 2015 and 2016, and was flat last year. Forecasts say there will be only modest increases in 2018, despite higher prices. Critically, this limited investment comes against the backdrop of sharp production declines in China, Mexico, and Venezuela.

“Upstream investment may be inadequate to avoid a significant squeezing of the global spare capacity cushion by 2023, even as costs have fallen and project efficiency has improved,” the IEA says.

If investment does not pick up, global spare production capacity could fall to as low as 2.2 percent of demand by 2023, the lowest level since 2007, the IEA says. At that time, oil prices rose sharply and ultimately reached $147 per barrel in mid-2008, undermining economies worldwide.

Even though the United States will become the largest producer in the world in the early 2020s, Saudi Arabia will still hold the most important role in the global oil market.

As the market tightens, OPEC’s influence will expand and its market share will rise. Even though the United States will become the largest producer in the world in the early 2020s, Saudi Arabia will still hold the most important role in the global oil market as a result of its OPEC leadership and the fact that it is the only holder of a significant amount of spare capacity.

The IEA’s Executive Director Fatih Birol kicked off the annual IHS CeraWeek by presenting its medium-term outlook, highlighting the global reach of the shale boom. Throughout the week-long event in Houston, oil executives, OPEC ministers, bankers, traders, and investors will give their viewpoints about the health of the oil industry, the direction of prices, and of course shale’s ultimate impact. Outlooks will diverge, but many are likely to echo the IEA’s warning that shale won’t save us over the long haul.

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