Peaked Oil?

Peak Oil is back at least for now! U.S. oil futures soared after he Energy Information Administration (EIA) acknowledged that U.S. oil output will fall despite earlier predictions to the contrary only to fall back after the American Petroleum Institute reported a 12.2 million barrel increase in crude oil supply. The market seemed to ignore a prediction by the EIA that oil might fall $15 a barrel if Iranian oil came back onto the market. This comes against a back drop of a mega energy deal that may signal more deals to come and a consolidated market bottom.

Let us start with EIA’s “Short Term Energy Outlook” that sent oil on a tear. “The reason was that the EIA said that U.S. crude oil production  is expected to peak this year in the second quarter and then decline in the third quarter, before picking up again toward the end of this year as projected higher crude prices in the second half of 2015 make drilling more profitable.” The reason why this gave the market such a big boost was because it directly attacked the ultra-bear’s mantra that no matter what U.S. production was going to continue in a straight upward trajectory. Yet it seems that Rig count cuts do matter and it is possible that the Energy Information Administration is underestimating the rate of decline that we may see.

They may be also overestimating the impact of the return of Iranian oil at least at the high end of their prediction. The EIA said that “A lifting of sanctions against Iran, should a comprehensive nuclear agreement be concluded, could significantly change the forecast for oil supply, demand, and prices by allowing a significantly increased volume of Iranian barrels to enter the market.  If and when oil-related sanctions on Iran are lifted, EIA’s baseline outlook for oil prices in 2016 could be reduced $5 to $15 per barrel from the forecast presented in EIA’s current outlook.”

We do know that the price of oil fell almost $5.00 a barrel on rumors of a possible Iranian deal but $15 a barrel is quite steep. If that oil hit the market today that might be possible but it’s likely that the oil will be released at least a year from now where at that point the supply versus demand balance should be much tighter than it is today.

I would also expect that Saudi Arabia would adjust their output at that time from their current near record production of 10 million barrels a day. Saudi Oil Minister Ali al-Naimi said that the Saudis at this point had no intention of cutting production now but would consider restoring market stability and restoring prices but only  if it  had help from other OPEC and Non-OPEC producers.

Yet the excitement about the fall in U.S. oil output was called after the API reported Crude supply exploded by 12.2 million barrel. Supply in the all-important Cushing Oklahoma storage area saw supply increase a modest 1.2 million barrels. Refiners saw a leap in activity rising to 91.1% of capacity. That lead to a 2.7 million barrel increase in gasoline supply and a drop of 331.000 barrels of distillates as refiners start rebuild summer-time gas supply.

When oil prices drop, mergers happen and when they do it is usually a sign that prices are getting close to a bottom!  Reuters reported that “Royal Dutch Shell (RDSa.L) agreed to buy smaller rival BG Group (BG.L) for $70 billion in the first major oil industry merger in more than a decade, closing the gap on market leader U.S. ExxonMobil (XOM.N) after a plunge in prices.  Anglo-Dutch Shell will pay a mix of cash and shares that values each BG share at around 1,350 pence ($20), the energy companies said on Wednesday. This is a hefty premium of around 52 percent to the 90-day trading average for BG, setting the bar high for any potential rival bidders.

The biggest merger this year will give Shell access to BG’s multi-billion-dollar operations in Brazil, East Africa, Australia, Kazakhstan and Egypt. These include some of the world’s most ambitious liquefied natural gas (LNG) projects.”

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