Yergin Sees Oil Price Near Bottom as US Output Set to Fall

(Bloomberg) -- Oil is near a bottom and global supplies look poised to close their gap with demand as investments in new production decline and consumption grows, according to Pulitzer Prize-winning author Daniel Yergin.

U.S. crude output, which surged to the most in more than three decades this year and triggered a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin, vice chairman at IHS Inc. Global oil supply and demand will begin to move into balance by late 2016 or 2017 and prices may rise to $70 to $80 a barrel by the end of the decade.

“We are in the bottom part of the cycle and a year from now the the market will be looking different,” Yergin, author of the award-winning book “The Prize,” said in Tokyo on Oct. 30. “These prices are having such a big impact on investment.”

The price slump contributed to more than $19 billion in oil and gas writedowns in a single week last month including Royal Dutch Shell Plc, which posted its worst loss in 16 years. Oil averaged 50 percent less in the third quarter compared with a year ago forcing drillers including Norway’s Statoil ASA to cut investments and delay production projects.

Yergin joins analysts including Gary Ross of PIRA Energy Group who predict an increase in demand next year will help offset the global oversupply. PIRA forecasts demand for oil will grow 1.7 million barrels a day in 2016, while Yergin said it may increase as much as 1.3 million barrels a day.

The last annual U.S. oil production decline was in 2008, according to the Energy Information Administration. Since then its almost doubled. U.S. shale production is still becoming more competitive and every dollar spent on new wells by the end of this year will be 65 percent more efficient than it was a year earlier, according to Yergin.

Lower prices will lead to consolidation in the U.S. shale businesses as weaker companies get bought or are forced to sell assets, according to Yergin.

“There will be a lot of intense M&A activity because there is so much available,” he said. “There is a lot of money in private equity firms and others waiting on the sidelines, waiting to come in.”

Brent crude, the benchmark for more than half the world’s oil, has dropped more than 40 percent the past year. Prices lost 1 cent to $48.78 a barrel on the London-based ICE Futures Europe exchange at 11:31 a.m. in Hong Kong. West Texas Intermediate was up 9 cents at $46.23 in New York.

--With assistance from Ben Sharples in Melbourne.

To contact the reporters on this story: Stephen Stapczynski in Tokyo at; Aaron Clark in Tokyo at; Emi Urabe in Tokyo at To contact the editors responsible for this story: Ramsey Al-Rikabi at Aaron Clark.

Copyright 2016 Bloomberg News.


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oilwatcher | Nov. 4, 2015
This will likely not end well for any of the producers. The purpose of an economic cartel is to impose its oligopolic powers on a market to the cartels price advantage. (Market share is only meaningful if it leads to greater profits). In this regard, it appears that the Kingdom of Saudi Arabia (KSA) and its OPEC faction badly miscalculated the effect of abandonment of OPECs de facto role as the supply-side market maker. First, KSA miscalculated the magnitude of the price collapse - which is costing KSA $9-$15 billion a month in lost revenue (and $1-1.5 trillion dollars a year for the industry as a whole) - I have not seen any compelling evidence that the npv of this forgone income will ever be recouped by the Saudis or anyone else in either increased sales volumes or future pricing (and with every additional month the hole only gets deeper - at this run rate, IMF notes that KSAs foreign reserve would last only 5 years). Second, the long-term cost of the increased uncertainty, speculation, volatility and dislocation of the oil markets may ultimately spur, not deter, a shift to alternative energy sources despite lower oil prices business hates unpredictability (volatility). Moreover, meaningless group OPEC production targets also fosters a continued culture of OPEC members seeking only their individual interests (in a race to the bottom). Under these conditions, restoring a managed marketplace (via restoring individual OPEC quotes, negotiated deal with Russia, Mexico, Brazil, etc. or other non-OPEC producers) will be more difficult - even if the KSA faction of OPEC eventually wants to do so. KSA & Co. were mistaken in believing that a 1-2 year (or more) period of low oil prices would safely eliminate its non-OPEC rivals (US shale, tar sands, etc.) and significantly extend the Age of Oil. While long-term invetments have been curtailed (a plus for OPEC), for many of the long-term/capital intensive producers (tar sands, etc.) OPECs timing was too late. True, rivals have been forced to cutback dramatically on spending and new production (and some producers many not survive), but the oil controlled by these rivals (or their restructured successors) will not disappear. As we have already started to see, the cost structure of these OPEC rivals may decrease significantly - not only through technological innovations (necessity being mother of innovation) and penny-pinching of oil field suppliers and workers, but also from a lowered cost basis of these restructured rivals neither of which may have happened or at least not as rapidly. As has been reported, this Frankenstein scenario, may mean that OPEC/KSAs actions create relatively low priced tight oil rivals (who can ramp up production in weeks or months with millions, not years or decades with billions) who will become the de facto price setters going forward (not an good prospect for profit maximizing producer/cartel). It is as if KSA thought the strong medicine of low prices would kill the tight/shale oil disease, but instead is more akin to a misuse of antibiotics where the target organism is damaged, but lives and the surviving ones are hardier and more damaging to deal with.... KSAs path may also mean the diminution in the power, influence, (and wealth) of KSA itself - as it is no longer the effective head of a functioning cartel, but instead is just one more commodity producer (albeit a very large and low cost one) seeking to hawk its product where ever it can... A far more interesting strategy would have been for KSA & Co to try to use some variation of Game Theory (coupled with a much more robust reporting/monitoring program among OPEC members and maybe even Non-OPEC members alike - Russia, Mexico, Kazakhstan, Brazil, Oman, etc.) to actively manage the growth of new oil in a way that would balance the supply/demand marketplace such that OPEC (and non-OPEC producers alike) could maximize profits in a stable controlled market environment. While there will always be a free rider/cheating element (and many political, sectarian, legal, anti-trust and other impediments), global technology exists today to monitor oil flow that wasnt available in the 1980s to spot/control cheating... And with the KSA factions power to dump to enforce market discipline, even the US and European Majors might have been tacitly enlisted to make the right choice (from a Game Theory Prisoners Dilemma standpoint) in terms production growth....

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