The Oil Shock That Never Was



The Oil Shock That Never Was
3 years ago, influential figures in the oil industry were sounding a clear warning.

(Bloomberg) -- Three years ago, influential figures in the oil industry were sounding a clear warning: prices were too low, investment was collapsing and by the end of the decade the world would face a shortage.

In reality, the market today is looking at several more years of plenty, so much so that OPEC is beginning its third year of production cuts just to prevent a surplus.

“We’re in an age of abundance,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. “A supply crunch is not likely at all.”

So what happened?

Oil’s biggest slump in a generation earlier this decade forced companies to slash spending, leading to a flurry of warnings that there wouldn’t be enough growth in oil supplies to meet rising demand and also offset production lost from aging fields.

Investment in oil and gas production collapsed by about $350 billion, or more than 40 percent, from 2014 to 2016 -- the sharpest contraction since the 1980s -- after crude fell from over $120 a barrel to less than $30, according to the International Energy Agency. The number of new projects approved in 2017 dwindled to the lowest in 70 years, the Paris-based agency said.

‘Alarm Bells’

In November 2015, the IEA cautioned that supply growth outside OPEC would grind to a halt by 2020. Three months later it was ringing “alarm bells” for a coming crisis. Total SA Chief Executive Officer Patrick Pouyanne foresaw a shortfall of as much as 10 million barrels a day, about the volume Saudi Arabia was pumping at the time. The concerns were echoed across the industry, from Royal Dutch Shell Plc executives to hedge fund veteran Andy Hall.

Instead, supply has turned out to be plentiful. The U.S. is estimated to produce about 12 million barrels a day of crude this year, a level it was earlier forecast to reach only in 2042. Russia has raised output to a record and Iraq’s is near unprecedented levels. Brazil is set to pump at the fastest pace in at least 15 years in 2019, according to the IEA.

Bank of America Corp. estimates three-quarters of non-shale projects over the next five years will be profitable at just $40 oil, bringing new crude from the North Sea to Guyana even if prices stay low.

These have kept benchmark Brent near $60 a barrel, despite a brief surge to a four-year high above $86 in October as American President Donald Trump’s sanctions against Iranian exports threatened to disrupt the market.

Pushed Back

Forecasts of a supply gap persist, but they’re being pushed further out into the future.

The world still needs to add another 10 million barrels a day of production capacity -- effectively another Saudi Arabia -- by the first part of the next decade, and investment in the industry outside shale isn’t sufficient to ensure this, IEA Executive Director Fatih Birol said in Davos, Switzerland, on Jan. 22. OPEC officials regularly say their current policy is aimed at encouraging enough investment to prevent a supply crunch.

Risks such as the U.S. sanctions on Venezuela and Iran still remain. But as America’s shale surge continues, and oil majors squeeze costs and deploy new technologies, the dangers of a prolonged shortfall are abating.

Though the shale boom has recently shown signs of slowing, the U.S. government forecasts that crude production will continue to hit new records into the next decade, turning a country once reliant on imports into an exporter to rival many OPEC members. Consultant Rystad Energy AS projects that the U.S. will be producing more oil than Saudi Arabia and Russia combined by 2025.


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WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

Ken Brown  |  February 01, 2019
Re 'experts' & forecasting an oil shortage. Even a broken clock is right twice a day.
Yarbles  |  February 01, 2019
Ca. 1998 the DOE was predicting the apex of proven reserves and production BEFORE the year 2000. More Globalist Elite horse crap just like AGW.
William Hunter Duncan  |  January 31, 2019
Never mind fracking in America has never turned a profit, racking up some 500 billion in debt since 2011, a ponzi scheme of epic proportions sure to blow up sooner rather than later. Never mind America consumes 19 million barrels a day, a shortfall of 7 million barrels, which becomes in the lexicon of ponzi, predatory economics, "Energy Independence." Never mind if big oil were taxed for the pollution they create, they would all be long bankrupt. Just another day in the life of this generation, private gains and public losses. Big oil, big banks, big corp, big billionaire....eternal growth being the ideology of cancer...
Michael Stone  |  January 30, 2019
Excellent article! Thank you, Grant. I never trust the experts. I do trust the American entrepreneur and free market. Costs were cut and companies became more efficient and continue to leverage technology. 2019 will be a big win for US oil and gas, and exports. Pipeline capacity will increase to support the additional growth for years to come. Electric cars will have to compete in this market as taxpayer paid subsidies are discontinued..
Nyoman Bagaskoro  |  January 30, 2019
Forecasting is a mug's game, although someone is bound to get it right most of the time by sheer lucky guesswork. That's how reputations are made. There's bound to be spikes in the future, and some may coalesce into a trend. Will that constitute a new normal? Unlikely - in the long term hydrocarbon use will decline in favour of sustainable resources and we'll all be out of a job. Make hay while the sun shines, it ain't gonna shine much longer.