Famed architect Mies van der Rohe was famous for his belief that sometimes you can do away with all the ornamentation on a building because sometimes less is more. They are now finding that out in the energy space these days, that is also true and if you do less you will be rewarded. OPEC and Non-OPEC found that out when they cut production to shore up prices and reduce oversupply. Now some shale producers are getting the message as well. Dow Jones reported that shares of Devon Energy, one of the largest U.S. shale companies, are up 4.2% after the company disclosed plans to spend less next year than some analyst estimates. Devon will invest between $2B and $2.5B on exploration and production, less than the $2.6B or more that had been anticipated, according to Tudor Pickering Holt. The stock surge according to Dow Jones stems in part from an interest that has intensified among some investors for shale companies to live within their means, reduce spending and temper their ambitions in the name of improving profitability.
This, of course, is a good thing for these companies and something we have been harping for a while. You can’t lose money on every barrel and expect to make up for it in volume. I applaud Devon for this wise move yet in some ways it was a decision that was forced upon them. Other shale companies will be forced to cut back as well especially the smaller outfits and while that is good for their balance sheets it does not bode well for future us oil production estimates.
What you are going to see is lower production growth of oil in the U.S. for an extended period. To reverse that slowdown, you may have to see an oil market sustained well above $60 or maybe even $65 a barrel.
Many shale oil companies are already overextended from a return on spending and banks will be more reluctant to lend them money. In the meantime, the U.S. shale output, per well, will continue to decline. There are some estimates that the U.S. shale industry would need to double their current CapX spending to increase production by another million barrels a day. There is no way that is possible in this low oil price environment.
Yet will this low-price environment remain? No. In fact, we are in the process of an extended oil bull market. With global growth smoking and production constraints and logistical issues rising we are more than likely in a generational bull market. The problem is that by the time the bankers believe it the shale guys will be playing catch up. Forget about the argument of the record amounts of drilled but uncompleted wells. To get them online you will need men and equipment both of which are in short supply. That means to get enough men and equipment you will need even higher prices.
Yesterday’s Energy Information Admintation (EIA) report is backing up the bullish backdrop even though the report was not as bullish as the wild and scary bullish American Petroleum Institute (API) version. The EIA reported that total commercial petroleum stocks feel stocks fell 5.8 Million Barrels at a time of year when they normally increase. Last year, for example, petroleum stocks increased by 9 million barrels. So, from last year total supply is down a whopping 75 million barrels from a year ago, an incredible year over year drop.
Crude oil supply fell by 2.435 million barrels as U.S. crude exports surged to another record at 2.13 million barrels of oil per day. U.S. crude production up week over week by 46.000 barrels to 9.553 million barrels a day, still short of the 10 million plus that we were supposed to be producing. Oil imports to the U.S. hit 5.4 million barrels a day just 20,000 barrels above a 5-year low. Gasoline stocks fell 3.5 million barrels, not as large as the 7 million-plus drop by API but still incredible for this time of year. Gas Demand increased by 8,00 barrels a day keeping it near seasonal all-time records.
Distillates stocks fell only 320.00 barrels easing concerns of a desperate tightening of supply, but the drop reminds us that refiners are still behind the eight-ball trying to keep up with surging global demand.
This comes as Reuters reports that OPEC is going to extend production cuts and wants a floor of $60 in 2018 according to Reuters!! Then you have the ongoing collapse of Venezuela. While they did make their bond payment to avoid a default their oil production is not being helped. Talk that tankers of Venezuelan crude is being turned back due to quality issues means their oil industry could be ready for a total collapse. Data shows that Venezuela's September crude production fell again to just 1.8 million barrels of oil a day, Sad.
About the Author
Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.
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