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Page added on August 7, 2015
Global Oil Supply More Fragile Than You Think
Many oil companies had trimmed their budgets heading into 2015 to deal with lower oil prices. But the rebound in April and May to $60 per barrel from the mid-$40s suggested that the severe drop was merely temporary.
But the collapse of prices in July – owing to the Iran nuclear deal, an ongoing production surplus, and economic and financial concerns in Greece and China – have darkened the mood. Now a prevailing sense that oil prices may stay lower for longer has hit the markets.
Oil futures for delivery in December 2020 are currently trading $8 lower than they were at the beginning of this year even while immediate spot prices are $4 higher today. In other words, oil traders are now feeling much gloomier about oil prices several years out than they were at the beginning of 2015.
The growing acceptance that oil prices could stay lower for longer will kick off a fresh round of cuts in spending and workforces for the oil industry.
“It’s a monumental challenge to offset the impact of a 50% drop in oil price,” Fadel Gheit, an analyst with Oppenheimer & Co., told the WSJ. “The priorities have shifted completely. The priority now is to discontinue budget spending. The priority is to live within your means. Forget about growth. They are now in survival mode.”
And many companies are also recalculating the oil price needed for new drilling projects to make financial sense. For example, according to the Wall Street Journal, BP is assuming an oil price of $60 per barrel moving forward. Royal Dutch Shell is a little more pessimistic, using $50 per barrel as their projection. For now, projects that need $100+ per barrel will be put on ice indefinitely. The oil majors have cancelled or delayed a combined $200 billion in new projects as they seek to rein in costs, according to Wood Mackenzie.
But the delay of 46 major oil and gas projects that have 20 billion barrels of oil equivalent in reserves mean that global production several years from now could be much lower than anticipated. Due to long lead times, decisions made today will impact the world’s production profile towards the end of this decade and into the 2020s. It makes sense for companies to cut today, but collectively that could lead to much lower supplies in the future.
That is a problem because the oil majors were struggling to boost oil production even when oil prices were high. 2014 was one of the worst in over six decades for major new oil discoveries, even though oil prices were high for most of the year. Despite high levels of spending, exploration companies are simply finding fewer and fewer reserves of oil.
Shale production has surged in recent years, but it could be a fleeting phenomenon. Precipitous decline rates from shale wells mean that much of a well’s lifetime production occurs within the first year or two. Moreover, after the best spots are drilled, the shale revolution could start to come to a close. The IEA predicts that U.S. shale will plateau and begin to decline in the 2020s. That means it would not be able to keep up with rising demand. Add in the fact that oil wells around the world suffer from natural decline rates on the order of 5 percent per year (with very wide variation), and it becomes clear that major new sources of oil will need to come online.
One other factor that could tighten oil markets over the long-term is the fact that Saudi Arabia has churned through much of its spare capacity. As one of the only countries that can ramp up latent oil capacity within just a few weeks, Saudi Arabia’s spare capacity is crucial to world oil market stability.
Many energy analysts like to compare the current oil bust to the one that occurred in the 1980s. But one of the major differences between the two events is that, in addition to the glut of oil supplies in the 1980s, was the fact that Saudi Arabia dramatically reduced its output from 10 million barrels per day (mb/d) down to less than 4 mb/d in response. As a result, on top of the fact that the world was awash in oil throughout the 1980s and 1990s, there were also several million barrels per day of spare capacity sitting on the sidelines, meaning there was virtually no chance of a price spike for more than a decade.
That is no longer the case. Today OPEC has only 1.6 mb/d of spare capacity, the lowest level since before the 2008 financial crisis. So while Saudi Arabia is currently flooding the market with crude, it has exhausted its spare capacity, leaving few tools to come to the rescue in a pinch.
That brings us back to the large spending cuts the oil majors are undertaking. With spare capacity shot and major new sources of oil not coming online in a few years, the world may end up struggling to meet rising oil demand. That could cause oil prices to spike.
30 Comments on "Global Oil Supply More Fragile Than You Think"
Makati1 on Fri, 7th Aug 2015 9:32 am
“…That could cause oil prices to spike.” And the world economy to crash.
Nony on Fri, 7th Aug 2015 10:22 am
$45 is like a kick in the head for these companies. Some of them started to stick their heads up above the parapet when prices were in the 60s. Time to hunker down again.
But that doesn’t mean that we will be back to $100. Projects put on hold can be restarted. And shale can restart fast. And the sooner it goes on hold, the more is left for later use.
Kenz300 on Fri, 7th Aug 2015 10:34 am
Electric vehicles, bicycles and mass transit will make for a better future……..
It is time for cities to become less auto centered and more people centered by providing more safe walking and bicycle paths that connect work, homes, schools and businesses.
There once was a time when trolley;s ran thru the center of most major cities. It is time to bring back the trolleys and make mass transit a more viable option for travel.
Davy on Fri, 7th Aug 2015 11:11 am
Well, I feel like some us here have been vindicated in regards to the planter glut and the Marm-i-NOo econ 101 happy face. We are very likely into a transitional process of demand destruction/supply destruction. I like to call this position in the BAU collapse process the bumpy plateau/descent gradient. If that is word salad well I am struggling to find terms for a paradigm shift of descent from 200 years of steady average growth.
I include a plateau and descent together because this process is uneven, random, and variable as degrowth dictates. We will now have new forces influencing our global system. These forces will be decay forces not development. They will be deflationary and inflationary but will revolve around less with a future of less. We will see economic abandonment, dysfunctional networks, and irrational policies.
This is what happens when one tries to maintain that which cannot be maintained. We will likely be all over the place with events because frankly everywhere you look there are negative events in progress. These events are not exclusive and will influence and support more negative trends. We can call them a converging shit storm for lack of a better term.
These are social, economic, and environmental. Just pick your poison and you will find it. Anything and everything is available at most locations. We are in an epic paradigm shift of population, economics, and environment. Oil and food are wrapped up in this and will be the fundamental driver of future collapse.
We are in population overshoot and consumption unsustainability this means it is just a matter of time before we are forced into other arrangements. We will be forced into other arrangements without protective clothing. This is over and above all the other simmering issues. I feel we are in the calm before the storm so baton down the hatches and hold on.
Plantagenet on Fri, 7th Aug 2015 11:22 am
Davy doesn’t understand that we can be in an oil glut now, and then after oil companies pull back on exploration and development, move to oil shortages and higher prices in the near future.
In fact, the current oil glut SHOULD lead to future oil shortages. Thats how the oil market works. The oil market has been going through boom-bust cycles for over a century—-and we just had a boom in 2009, now we are in a bust, and some time n the future there will be a boom again.
CHEERS!
joe on Fri, 7th Aug 2015 11:37 am
Wasn’t this the opec plan? Market share. As in sink the price, keep everyone cut investment (like high eroei and high cost shale for example) so ensuring that next time they cut production, everyone has no option but to keep buying Saudi oil.
At this point then it’s a slam dunk to imagine oil back at 100 in 3-5 years. Mix in mass migration from the third world into Europe and from Latino regions into the US; should peak oil hit hard, then the non white majority will find itself surrounded by majority white towns in charge of all the sparse and non productive agricultural areas. A perfect scenario for a mass migration back to the land and with it lower life expectency.
shortonoil on Fri, 7th Aug 2015 11:42 am
@Davy,
“I include a plateau and descent together because this process is uneven, random, and variable as degrowth dictates.”
Watever posted graphs applying a non-linear system approach to the Etp Model at the link below:
http://peakoil.com/forums/the-etp-model-q-a-t70563-180.html
The price swings are not random, but they are definitely variable. Take a look at them, I think you’ll be amazed at what he came up with.
http://www.thehillsgroup.org/
marko on Fri, 7th Aug 2015 12:27 pm
The demand is down and we are balancing on a very thin rope. When the demand start to rise no chance that supply will catch up with it. The only real question is how long will take before it happens
shortonoil on Fri, 7th Aug 2015 12:28 pm
“Davy doesn’t understand that we can be in an oil glut now, and then after oil companies pull back on exploration and development, move to oil shortages and higher prices in the near future.”
Plant does not understand that crude prices are now capped because of ramifications that are resulting from the laws of physics. His so called “glut” is an effect, it is not a cause. The present over supply is no more likely to alleviate itself than it is likely that water will start running uphill. The present price structure is now in something analogous to a gravity well, and it only has one direction it can go.
We will be seeing a constant oversupply until the petroleum industry can no longer function. The deterioration of the industry is the final step in the ending of the oil age. Such simplistic excuses as “glut” can only serve to shroud consequences that will become deadly. They will leave the world completely unprepared for what is to come.
http://www.thehillsgroup.org/
Nony on Fri, 7th Aug 2015 1:31 pm
Davy, if it were demand destruction causing price to drop, we would have volume consumed decreasing. But it has risen. That is proof of excess supply. Of “glut” (although I hate that term and the term “shortage”. It is better to just discuss supply and demand.)
A high price, before, was a GREAT argument for the peak oil dynamic (scarcity rents, running out of cheap oil, etc.) However, that means that cheaper prices now must be seen as evidence against POD. Or at least less support for it.
You can’t have it both ways.
Davy on Fri, 7th Aug 2015 2:03 pm
Sorry NOo, it is more complicated than your econ 101 supply and demand because oil is foundational and our interconnected global system is all inclusive. You cannot separate econ issues and finance out of what is “life” You are abstracted into a cocoon NOo.
This demand destruction is happening because it only requires decreasing growth to cause issues when so many problems and predicaments are involved. This is especially true with overconsumption growth and overpopulation pressures.
NOo, your issue is you are so smart you have to stay specialized and compartmentalized. This allows you to dazzle people with your econ and financial marketing speak but you are lost in the general. NOo, you are a Confucianism and I am a Taoism as a messy rough example. I ready every one of your comments because they are exceptional in a narrow specialized view. When you rise to the general you can be ridiculous.
GregT on Fri, 7th Aug 2015 2:08 pm
“The greatest shortcoming of the human race is our inability to understand the exponential function.”
This is especially true of the eCONomists. As displayed above.
GregT on Fri, 7th Aug 2015 2:10 pm
Thanks Davy,
You beat me to it. A different way of saying the same thing.
GregT on Fri, 7th Aug 2015 2:19 pm
i used to believe that the Nony/Marm would eventually come to his senses, but it turns out that he just isn’t the sharpest tool in the shed. Like my grandfather always said; You can lead cattle to water, but you can’t make them drink.
shortonoil on Fri, 7th Aug 2015 3:12 pm
“Davy, if it were demand destruction causing price to drop, we would have volume consumed decreasing. But it has risen.”
Confused? I’m sure you are. You are trying to measure the temperature of water with a five gallon pail. Oil production is an energy function because that is why we use it. We don’t use it to fill up gas tanks; we use it because it makes things go. There was, for a long time, a close correlation between the volume of petroleum, and the energy it delivered. That correlation is now so far out of whack that the volume metric is almost useless. You would be right on target – if it was 1930! This is the world of high speed internet, cell phones, and digital thermometers. You are still plodding along on old Neil while the world is whisking by in Tesla. It is not surprising you can’t figure out why it is leaving you far, far behind.
MSN Fanboy on Fri, 7th Aug 2015 6:28 pm
“and it only has one direction it can go.”
Strong words Planter
Only time will tell
MSN Fanboy on Fri, 7th Aug 2015 6:29 pm
*Shortonoil lol
No idea what happened then
agramante on Fri, 7th Aug 2015 7:27 pm
I’m not an economist by any means but I can imagine how consumption grows while demand falls. Not being part of the petroleum buying profession, I can’t speak to it in detail, but I do know that buyers negotiate prices for parcels of oil (actual oil, not just futures). Those buyers certainly don’t have carte blanche to bid as high as they please, but have spending constraints. When their spending constraints are tighter, in aggregate, a weaker bidding market leads to lower prices all around. This is my decidedly layman’s (or at least engineer’s) view of the buying market. I’m sure it’s not close to detailed enough but I hope I have the main idea right.
In a global economy predicated on growth, weaker-than-expected growth counts as evidence of economic trouble. China’s economic weakness has become a prominent topic, and I have little doubt that was the main reason for last year’s price drop in oil: the Chinese simply didn’t bid as aggressively for oil.
It’s beginning to look to me like China could be in for a prolonged slump, and even qualify as a depression. Shortonoil–I’m not a market analyst like you, so I don’t quite follow you on how prices are capped by physics–do you say physics simply as a metaphor, or are you talking about EROEI? I do understand, and accept, the idea that oil prices are capped in a way by supply limits–that if prices go too high, economies can’t afford them, and prices crash, but not too far since there’s still a huge global baseline level of oil consumption. But when economies then begin to recover and begin consuming more oil, because supply is so tight (there being nothing resembling the glut of spare capacity we had in the 80’s–oversupply is now a much narrower and ephemeral thing), prices then go back up quickly to unsupportable levels.
That’s how the theory goes–is that what you’re referring to with the term “physics”? If so, I’m largely in agreement. We got a few illustrations of it over the past seven years (following the 2008 crash), but this price slump is bigger because the impacted economy, China’s, is much bigger, and will likely take a longer time to recover. But other factors, like those mentioned in the article, enter in: terminated capital projects in the oil industry now will impact future supply, further tightening the price spike-price crash feedback, or rather, increasing its frequency, if not also its amplitude.
Davy on Fri, 7th Aug 2015 7:42 pm
Agramant, what if there is no recovery? Nowhere is it written recoveries must happen. Economies can implode and end. I see this as one of the biggest obstacle to understanding what is happening with oil.
Why can’t you all acknowledge the possibility of an endgame? Maybe it is slow maybe it is quick but it appears down not up. Maybe some gyrations but trending down per ecology and physics. Why are we humans so exceptional and think we can transcend ecology and physics? Isn’t that thinking irrational per science? I wish it were different but reality says otherwise.
Davy on Fri, 7th Aug 2015 9:00 pm
This is what I have been trying to get across here. We may be in the end game without recovery. Oil will be part of this. There is no decoupling oil from the process. It does not matter oil is special and foundational. It takes and economy to bring oil to the consumer in an end product. This is something so many people here will not even entertain. It is as if this potential end game is fictional and not real. It can be pondered but it can’t be incorporated into a view point. Deflation is demand destruction plain and simple. Demand destruction will destroy supply plain and simple. I see this process as real and current. My only question is time frame.
“The Top’s In” David Stockman Warns Of “Epochal Deflation”
http://www.zerohedge.com/news/2015-08-07/tops-david-stockman-warns-epochal-deflation
“The truth hurts… especially permabullish CNBC anchors. But when David Stockman explained why “the top is in,” and warned that the world is overdue for an “epochal deflation, like nothing it has ever seen,” one should listen. The “debt supernova” of the last decade or two has created massive over-capacity and this commodity deflation “is not temporary, it’s the end of the central bank bubble.” The catalyst has already happened -“It’s China,” Stockman exclaims, “China is the most lunatic pyramid of credit and speculation.. and capital is now fleeing the swaying towers of the China ponzi.”
BobInget on Fri, 7th Aug 2015 9:12 pm
In the day of google it’s a bloody wonder how easy it is to fool people.
http://www.reuters.com/article/2015/07/13/china-crude-imports-idUSL3N0ZN2MJ20150713
BEIJING, July 13 (Reuters) – China’s June crude oil imports rose 27 percent on year, customs data showed on Monday, putting the world’s second largest economy into contention again for topping the United States as the biggest buyer of the commodity on international markets.
**************************************************************************
Almost always when commentators knock China’s growth they always forget India,
Vietnam, Korea, Taiwan etc. (The Worst Storm Ever Recorded is now pounding Taiwan)
http://www.cnn.com/2015/08/07/asia/typhoon-soudelor/
China’s next.
Davy on Fri, 7th Aug 2015 9:26 pm
Bob, do you feel like Atlas sometimes with your optimisim?
https://en.wikipedia.org/wiki/Atlas_(mythology)#/media/File:MAN_Atlante_fronte_1040572.JPG
WTF on Fri, 7th Aug 2015 10:05 pm
Is futilist mentally ill? He seems kinda paranoid.
agramante on Fri, 7th Aug 2015 11:23 pm
Of course it’s possible that there will be no recovery, Davy. I don’t pretend to be able to predict the future. But I also don’t assume that every development is the sure sign of end times. My assumption tends to be, that things will carry on bumpily enough, and I’ll prepare for tougher times to come as well as a I can (that plan’s taken a huge step backwards this year with offshore work being so hard to come by). If this is really the beginning of the end, we’ll cope as well as we can. If it’s not, and the global economy/shell game continues for another five, ten, or twenty years, or even longer, we’ll carry on then as well too. Last year I was reading ominous predictions that the oil price slide was sure evidence of the beginning of the end. I sure can’t say that’s untrue, but it honestly doesn’t change a single thing I’m doing now. To put it a different way, I don’t share Michelle Bachmann’s certainty that the end is so near. Doesn’t mean it’s not, but I’m not so convinced.
Davy on Sat, 8th Aug 2015 12:18 am
I’m sorry I scared you WTf. First timers often react that way. The freedom is liberating if you open the door.
Davy on Sat, 8th Aug 2015 12:26 am
Agremante, the end is not the end. This is a process. The point I am making is there is no reason there will be a tomorrow as we know it today. The inertia of 7BIL people will likely carry on but at some point the momentum will succumb to gravity. It always has. Our issues is when not if. If this is 10 years out then what we are doing now is academic. If this is 1 year out what we are doing now is survival. The problem is we don’t know nor can we know.
apneaman on Sat, 8th Aug 2015 1:04 am
Michelle Bachmann?
Davy on Sat, 8th Aug 2015 8:40 am
Folks, I am referencing several Zero Hedge articles because the most important disturbance on the radar screen currently in my opinion is the global economy. Oil is reacting to global economic woes. The oil complex is dysfunctional now because our global economy is increasingly dysfunctional.
I highly recommend this article for a taste of the unreality in our financial system. This is an unreality that permeates all structures of modern life because we are all global capitalist now whether we like it or not. We are all delocalized locals depending on a global for our vital requirements.
I have referenced China in the below paste because China was the last growth engine that kept the global ship afloat. Cornucopians are going silent with all the bad news coming out of Asia. What other good news is there? US equity markets will surely catch the contagion eventually from China no matter how hard the Fed tries to prevent it.
BTW, I have been preaching an end game out of China for a year now. I have been bashed by perma-bulls and Asiaphiles alike. It has always been obvious to me China is the end game of globalism.
http://www.zerohedge.com/news/2015-08-07/economic-reality-now-catching-market-fantasy
Economic Reality Now Catching Up To Market Fantasy
Asia is the biggest story right now, with Chinese markets in veritable free fall despite all attempts by the communist government to quell stock selling and shorting, to the point of threatening arrest and imprisonment for some net short sellers.
China’s Shanghai Stock Exchange has experienced a 30% drop in market value in a month’s time. The mainstream argument meant to marginalize this fact is that less than 2% of China’s equities are owned by foreign investors; therefore, a crash there will not affect us here. This is, of course, pure idiocy.
China is the largest importer/exporter in the world; and it’s set to become the world’s largest economy within the next two years, surpassing the United States. China’s economy is a production economy, and the nation is a primary supplier for all consumer goods everywhere. Thus, China is a litmus test for the fiscal health of the rest of the world. When Chinese companies are struggling, when exporters are seeing steady overall declines and when manufacturing begins to crawl, this is not only a reflection of China’s economic instability, but also a reflection of the collapsing demand in every other nation that buys from China.
agramante on Sun, 9th Aug 2015 12:29 am
apneaman–yes, Michelle Bachmann, onetime representative from Minnesota, and one of the right wing’s dingbattiest religious nuts, who pines publicly on a regular basis for the end times. She’s a lawyer so supposedly she has some intelligence but you wouldn’t think so based on most of her quotes.
apneaman on Sun, 9th Aug 2015 1:09 am
I did not know she was still around. I can only see the religious nutters getting louder and dangerous as the great unraveling continues. Nothing stokes up the fear, hate and blame in troubled times like religion can.