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Page added on March 11, 2015
North America will continue to build market share in global oil market
“Today’s low prices will encourage consumption”
Today’s global oil market collapse is eerily reminiscent of the dot com crash of 2000. Like the 1995-99 hype accompanying the rise in internet stocks, over the last several years there has been enormous promotion of the “game changing” unconventional technologies used to develop North American shale and oil sands reserves. Following their huge run-up, both high technology and North American oil and gas stocks experienced implosions – the high tech NASDAQ composite index fell 78-percent from the peak in 2000, and in the past six months, the S&P/TSX Oil and Gas Producers Index has fallen about 35 percent.
There is widespread coverage of layoffs in the oil patches of Alberta, Texas and North Dakota. The Alberta government is warning of looming deficits and tough choices ahead. Many investors have concluded that low-cost Saudi Arabia has launched a market share war it is sure to win against high-cost North American unconventional production.
A recent report from the International Energy Agency (IEA) adds a much needed perspective to the debate. According to the IEA, the North American unconventional oil business in general and Canada’s oil sands in particular will emerge from today’s unrest larger and stronger. To understand why, let’s examine the demand and supply dynamics of the oil market. In 2014, global oil and natural gas liquids demand was about 92.4 million barrels per day, having grown by about 1.0 million barrels per day each of the last 4 years while prices averaged about $100 per barrel.
However, supply over the last year or so began growing faster than 1.0 million barrels per year, oversupplying the market and ultimately leading to the recent fall in prices (about 50%) as the market tried to find equilibrium. The IEA’s report tells us that today’s low prices will encourage consumption – drivers will take longer trips and buy bigger vehicles, for example – increasing demand by around 1.1 million barrels per year to reach about 100 million barrels per day in five or six years (around 2020).
In the short term, there is likely going to be limited supply growth due to today’s low prices around $50 per barrel. Therefore, the global market, which is oversupplied about 1.5 million barrels per day, should be back in equilibrium in about 1.5 years or less – a blink of an eye considering North America has several decades’ worth of reserves at current production rates.
The question should not be whether the energy business will recover, but how will that 100 million barrels per day of demand by 2020 be supplied? Based on analysis by the IEA, Saudi Arabia has kept its share of global supply roughly the same at about 11 percent for more than 10 years and has made it very clear it is not looking to increase production. Almost all other members of OPEC (Organization of the Petroleum Exporting Countries) have already been producing close to capacity and their share of global supply has stayed fixed for 10 years at approximately 29 percent.
OPEC is not likely to supply more than 40 percent of the world’s demand and Russia’s share of global production is expected to fall to about 10 percent of global supply. Together, in coming years, they are not likely to produce more than about half of the world’s oil. North America is not wrestling for market share against these strong producers.
Meanwhile over the last 10 years, the U.S. and Canada’s market share of global supply has jumped from 4 percent and 10 percent, respectively, to 5 percent and 15 percent, capturing market share from an eclectic mix of countries across Latin America, Europe, and Asia, also known as the Rest of the World (“ROW”).
All of North America’s growth has come at the expense of ROW, which has seen its share over the last 10 years fall from 35 percent to 29 percent as a result of factors like poor geology, unfriendly fiscal regimes, lax rule of law and resources owned by slow-moving governments (there are a few exceptions, such as off-shore Brazil). North America is facing a winning battle for market share against the feeble ROW.
The IEA is forecasting that by 2020, North America will have increased production from today a further 3.0 million barrels (20 percent) and be producing about 19 million barrels per day.
Both the IEA and the futures market are currently pricing oil in 2020 at $73 per barrel. At that price, the North American energy industry will be earning revenue of about $1.4-billion per day in 2020 – comparable to the $1.5-billion per day in 2013 when oil was $100 per barrel. With costs lower, returns will remain attractive at $73 per barrel.
In the future, we will look back at today and realize that, like the internet in 2000, the North American unconventional oil business today is just taking a breather before moving on to scale greater heights. Get set for the next oil boom.
23 Comments on "North America will continue to build market share in global oil market"
Plantagenet on Wed, 11th Mar 2015 3:37 pm
The comparison with the 2000 tech collapse is interesting —-just because tech stocks collapsed in 2000 we didn’t stop using tech. Just because the oil price collapsed in 2015, we aren’t going to stop using oil
penury on Wed, 11th Mar 2015 3:50 pm
The problem I see with this forecast is: 1. CAPEX which has mostly been borrowed at low interest will probably have to be paid out of earnings in the future. 2. Re=payments for existing loans may or may not be possible at current prices. 3. And yes with oil at 73.00 per barrel the price may be attractive, but at 48 dollars per barrel which must also include possible long term storage charges maybe not so much. 4. Low prices are a short term problem, however storage may be a longer term problem and no one can forecast how long the short term downturn in the prices will last. In the best of all scenarios yes production will increase. In reality sometimes things go different than we would like.
dave thompson on Wed, 11th Mar 2015 5:16 pm
The graph illustrates just how much of an “oil glut” there is. Demand and supply are just about even. With supply clearly not much more then demand, AND only showing up in the last year as what? Maybe an extra 1 million or so?
Makati1 on Wed, 11th Mar 2015 7:02 pm
A Wall Street Pimp article using the IEA lies as facts…
Plantagenet on Wed, 11th Mar 2015 9:05 pm
@dave thompson
Do the math.
Even if there is only an “extra” one million barrels of oil per day, then after a week there are 7 million unsold bbls of oil sitting around. After a month there are 30 million unsold bbls of oil needing to stored. After three months you’re looking at ca. 100 million bbls of extra oil. After six months there would be 200 million extra barrels of oil
Oil prices started softening in Early 2014—about a year ago. Over a year there would be ca. 350 million extra bbls of oil waiting to be sold.
All that extra oil adds up—-and pushes oil prices down. No wonder the price of oil collapsed three months ago—we’re in an oil glut!
GregT on Wed, 11th Mar 2015 9:27 pm
“Over a year there would be ca. 350 million extra bbls of oil waiting to be sold.”
And that 350 million barrels would have helped to kickstart the economy, if it was affordable. Which it isn’t.
dave thompson on Wed, 11th Mar 2015 10:31 pm
Plant,”After three months you’re looking at ca. 100 million bbls of extra oil. After six months there would be 200 million extra barrels of oil” So what? the world demand is 90million per day. That means we have an extra few days of oil on hand, still not much of a “glut”.
Apneaman on Wed, 11th Mar 2015 11:51 pm
The Crash of 2015: The End of the Beginning
http://www.dailyimpact.net/2015/03/11/the-crash-of-2015-the-end-of-the-beginning/#more-2770
Sugar Seam on Thu, 12th Mar 2015 2:19 am
^ that list of fracktacular bankruptcies checks out… interesting link, Ape.
Apneaman on Thu, 12th Mar 2015 2:33 am
The guy (Tom Lewis) who owns that blog (The Daily Impact)has been around for a long time and he is very through. He is an old school journalist.
Perk Earl on Thu, 12th Mar 2015 3:23 am
Here’s an interesting article on the rise of the dollar vs. other struggling currencies:
http://investmentresearchdynamics.com/the-u-s-dollar-is-going-parabolic-something-somewhere-is-collapsing/
The U.S. Dollar Is Going Parabolic – Something Somewhere Is Collapsing
the_ultravixens on Thu, 12th Mar 2015 5:36 am
What the hell is that graph supposed to show us? Whoever decided on those axes needs their head examining.
shortonoil on Thu, 12th Mar 2015 6:37 am
Both the IEA and the futures market are currently pricing oil in 2020 at $73 per barrel. At that price, the North American energy industry will be earning revenue of about $1.4-billion per day in 2020 – comparable to the $1.5-billion per day in 2013 when oil was $100 per barrel. With costs lower, returns will remain attractive at $73 per barrel.
“We have a freshly painted bridge, and have we got a deal for you!”
1.2 mb/d of US production essentially has no market! It has an API that is greater than 50; which makes it about as valuable as teats on a bull. It could be used as a feedstock material IF there was an economy to buy it. Unfortunately, the world just doesn’t need that much plastic pipe.
http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png
The quality of liquid hydrocarbons has declined to the point that a large portion of it is essentially not usable. This excess goes into storage, and the price declines. Since depletion assures that this extra supply is not going to be getting any better in the future, the price will continue on its downward path:
http://www.thehillsgroup.org/depletion2_022.htm
It seems more than likely that the IEA is aware of what is happening. To stay viable the oil industry is going to have to find a market for a lot of now useless, stinky, black goo. Since it is not likely that anyone on earth can use the stuff, maybe the Martians would be interested? Maybe, the IEA should consider turning itself into an off planet sales organization. They might be better at that than they are at predicting the price of oil in 2020.
http://www.thehillsgroup.org/
Perk Earl on Thu, 12th Mar 2015 7:15 am
ultravixens, you can always try and contact the Author of the article to let them know your criticism/s of their graph.
Davy on Thu, 12th Mar 2015 7:22 am
Good links Ape and Perker and they point to slow motion crash. I like to call it a bumpy descent and we are leaving the bumpy plateau of 2005 conventional oil peaking and the pregreat recession of 2008 financial normality. The oil industry and financial system combined in a cocktail of debt, rate repression, and unconventional oil production to create the bumpy plateau where the reality of limits were discarded.
We are now in the bumpy descent of limits and diminishing returns of these financial actions and the unconventional oil production. The consequences of so much debt and so many years of low rates have created consequences that are obvious but also a flurry of unintended consequences.
The consequences of the debt binge and easy rates is addiction of the system to these 08 financial repression of rates and debt monetization. The asset bubbles and commodity inflation created the fracking bubble and an equity/bond market bubble. These are bubbles by any pre new normal fundamentals. Today they are explained away by the talking heads.
We have a FX market in stable disequilibrium but itching to bifurcate into hyperinflation of confidence loss. The dollar has gone postal and is threatening to dump the apple cart especially if rates go up which I cannot see how they can without economic damage. Fed wants to raise rates because they no longer have any useful tools except jawboning all is well or they can help. 24 countries have cut rates????? Guys when you cut rates do you do that when the economy is booming are sputtering? I think you know that answer. That is unless you are in an unreality like Booby-get and Planter-poo who claim demand is fine don’t worry-be-happy.
The unintended consequences of all this has been a subtle and across the board wealth transfer high risk indebtedness, excessive margin leverage, high risk bond exposure, and rehypothecation. These negative financial situations are across the spectrum of financial collateral, sovereign’s bonds, industry debt, and equity and bond markets.
Since we are at limits and diminishing returns of a new normal financial paradigm that has failed to break out with real growth we have deflation issues that are dangerous to debt service at all levels. We also have the derivatives market that is anything but transparent that was supposed to lower risk by dispersing it. In reality this market is a time bomb of further TBTF counterparty risk spread throughout the system.
Yet with all the above wrong with the system you just don’t know the what and when will happen because the whole system is a charade of unreality based upon corruption, manipulation, economic indicator distortions, debt creation, debt elimination, extend and pretend, and kick the can. We have bad debt and mal-investment off the charts especially in China. This will never be paid for so it will have to be monatarized away somehow.
We know these situations and they are fairytales and fiction. Eventually the lies multiply exponentially and there comes a point where the curtain gets ripped down and the mighty man behind the curtain is naked and ugly. We are there folks but it is really down to human nature now of roughly 200MIL humans or so and their decisions. Human nature of confidence lubricates the system.
Then POD depletion of our foundational commodity oil especially the ETP is a brick wall in 5-10 yr depending on the economy. We are already seeing the effects of a cycle of demand and supply destruction.
We have multiple meat eating black swans circling especial regional conflicts. We have failed states in the making. We have increasing social unrest at perceived unfairness. We have a big brother police state forming. All this wrapped up in a population in overshoot with consumption overshoot. This all points to a financial crash and the beginning of nature’s effort to moderate our population and our consumption
viewcrafters on Thu, 12th Mar 2015 8:11 am
Depletion will be well on its way by 2020.
Americas landscape will be trashed.
rockman on Thu, 12th Mar 2015 8:16 am
As far as having “X millions of unproduced oil left underground” the very key portion of that phrase is “…left underground”. Oil in the ground can’t be sold and delivered to a refinery. It has to be produced. And a well that can has been producing at its max rate can’t produce more oil then that rate. And a well that has been choked back from it’s max rate (or completely shut in) typically can’t be produced at a rate higher then what it had been producing.
The physics of producing an underground reservoir is nothing like pulling oil put of a storage tank. If the rate of producing wells were intentionally reduced by 1 million bbls/day then those 365 million bbls that weren’t produced over the next 12 months would take another 365 days to produce.
Which is why you rarely see oil producers, especially in the US, not produce at their max rate regardless of the price of oil. Holding back 1 million bbls per day now with the current price would reduce gross revenue by $18 BILLION over the next 12 months. If oil prices increase after 12 months operators can’t suddenly sell those 365 million bbls of oil over night. They’ll make a better cash flow after that point in time…if the hadn’t gone under as a result of insufficient revenue during the previous year.
shortonoil on Thu, 12th Mar 2015 8:34 am
What the hell is that graph supposed to show us? Whoever decided on those axes needs their head examining.
That graph is supposed to convince the reader that a HUGE over supply crashed the market by 50%. Look at the gigantic over supply in 14′ Q4 (if you can see it) it amounted to 1.6% of world production. That means that 20 more Twinkies on the market will cut food costs by 50%. There is absolutely no reason to have anyone’s head examined; it’s obvious, they are an idiot!
These analyst (???) must be using a model they found in Marty Python’s “Quest for the Holy Grail”. Next thing they will be telling us is to watch out for the Man Eating Rabbit! Our premise is that they don’t have a clue as to what is going on. Maybe, some day they will figure out that someone is producing a whole lot of junk that no one wants. Maybe!
http://www.thehillsgroup.org/
gdubya on Thu, 12th Mar 2015 10:08 am
Good news! Another cubic mile of petroleum burned into the atmosphere this year! Commuting in a giant truck is cheap again! Things are looking up for the economy!
Meanwhile the arctic ocean has lost most of its ice volume, birds are out of synch with their insect prey, anyone who looks at a tree sees it is sick but doesn’t realize it is a worldwide problem; nobody knows what is going on with Antarctica’s ice, and everyone is curious about why the weather has been so weird the last few years.
Doesn’t matter – the Oklahoma raiders play the Toronto bruins tonight.
JuanP on Thu, 12th Mar 2015 10:52 am
What a stinky article!
“Meanwhile over the last 10 years, the U.S. and Canada’s market share of global supply has jumped from 4 percent and 10 percent, respectively, to 5 percent and 15 percent”
Experts, isn’t this whole paragraph wrong? Or maybe the order in which the countries and numbers are listed doesn’t matter? The way I read it, it can’t be right. Maybe I am getting lost in translation.
I found the mixing together of US Shale Oil with the Canadian Tar Sands as North American Unconventional oil as purposefully confusing to the masses. They are very different things. The Canadian Tar Sands are basically a mining operation while shale wells decline fast and require constant new drilling to maintain production.
The scales on that graph make it completely useless.
And I will repeat myself and say once more that all EIA and IEA future proyections of oil production and consumption have always been garbage, so I will ignore the rest of the article as it is based on them.
I agree with Short that the IEA knows the truth and is lying on purpose, I have been of this opinion for around a decade. Fatih Birol has implied as much several times. The same applies to the EIA. They are both political, not scientific institutions and their reports and proyections require political consensus.
I wish I could believe this crap, I’d be a lot less worried about the short term future.
Speculawyer on Thu, 12th Mar 2015 2:55 pm
*scrolls down to bottom*
Financial Post. Ah, that explains the silly cheerleading article.
Kenz300 on Sat, 14th Mar 2015 12:28 pm
The world continues its transition away from fossil fuels every day. Every major auto maker is now producing electric vehicles. Every utility is now investing in wind and solar energy production.
Cities are now becoming less auto centered and more people centered by providing more walking and bicycle paths.
The world is in transition away from fossil fuels and toward safer, cleaner and cheaper alternative energy sources.
Investments in wind and solar are providing safer and more consistent returns.
The fossil fuel industry will go away kicking and screaming …. but they will go.
Kenz300 on Sat, 14th Mar 2015 12:28 pm
The world continues its transition away from fossil fuels every day. Every major auto maker is now producing electric vehicles. Every utility is now investing in wind and solar energy production.
Cities are now becoming less auto centered and more people centered by providing more walking and bicycle paths.
The world is in transition away from fossil fuels and toward safer, cleaner and cheaper alternative energy sources.
Investments in wind and solar are providing safer and more consistent returns.
The fossil fuel industry will go away kicking and screaming …. but they will go.