By Irina Slav
Amid reports that OPEC will likely decide to start easing production quotas after June 22 and an IEA forecast that electric vehicles will displace 2.5 million bpd in crude oil demand by 2030, some analysts remain upbeat about the future of oil prices, citing transport constraints in the U.S. shale patch as well as companies’ prioritization of returning cash to shareholders over investing in new production.
CNBC recently quoted one such analyst, Tamar Essner from Nasdaq Corporate Solutions, as saying “I think it’s temporary. I think the fundamental picture is still really strong. The market’s getting a bit dislocated right now based on a risk-off sentiment.” Essner went on to note the 500,000-bpd fall in production in Venezuela and speculated that it could fall by another half a million barrels daily by end-2018. If this happens, he said, U.S. shale drillers would not be able to ramp up production quickly enough to meet growing demand.
Indeed, Venezuelan production has been sliding inexorably, and chances are that it will continue to fall until the year’s end, at least. However, U.S. drillers have increased their daily production since the start of the year by 1.28 million bpd already, if we are to believe EIA’s weekly production estimates and monthly reports, which have historically proven to be quite accurate.
So, that’s 1.28 million bpd more over five months. Even if the EIA is erring on the positive side, the increase in U.S. production could be around 1 million barrels daily, which would be enough to offset a Venezuelan production decline of the same proportions.
But, say bullish analysts like Essner, U.S. drillers have already hedged their production at lower prices, so they won’t see as much cash coming in as they would have otherwise. Also, they have made their capex plans based on cheaper oil. True as this may be, again, if we are to believe EIA figures, drillers are drilling more and pumping more oil. The situation is a bit paradoxical.
On the one hand, there is a looming shortage of workers—because of the higher production levels—as well as investors demanding cash instead of more production. There are also the pipeline bottlenecks in the Permian forcing drillers there to sell their crude at a discount.
On the other hand, production is growing. This growth may be unsustainable over the long term as shale skeptics like to remind us, but for now, it is growing consistently and this is keeping a cap on prices.
Besides, it’s not just the U.S. that is producing more. Canada is also pumping more crude, although, in truth, most of this crude goes to U.S. refineries and at a huge discount, so Canadian crude production patterns are not as significant for international markets as U.S. patterns. Brazil is also producing more… and Rosneft just said today it has upped its production by 70,000 bpd just to see how quickly it could return to pre-deal daily rates, it said.
That’s an increase of 70,000 bpd in three days, and the Russian state mammoth has spare capacity of 120,000-150,000 bpd. And Rosneft is just one producer in one participant in the OPEC+ deal. The total spare capacity OPEC and its partners have is well over a million barrels, even if we exclude Venezuela, which is in no position to reverse the production decline at will like the rest of the group.
So, even if U.S. shale drillers are suffering from pipeline bottlenecks, worker shortages, and investor demands for higher returns, there is production capacity around the world to respond to rising demand. And let’s remember that this rising demand is only forecast. It has not yet become a fact. So, things can change, and not jut because of EVs. There are many more factors than can swing oil demand one way or the other.