October 15, 2014
Author: Bjornar Tonhaugen, VP Oil & Gas Markets
As oil prices are plummeting, the oil market is looking for clues about how low prices can go before we see a response on the supply side. The market’s attention is naturally turning towards OPEC and North American (NAm) shale production, but Rystad Energy’s latest analysis shows that a significant reduction in shale volumes at current prices should not be expected. NAm shale oil output will respond very slowly to a drop in oil prices. Recent history, such as outages in Libya, shows that supply shocks of up to 500 kbbld could be needed to move global oil prices 10 USD/bbl. Rystad Energy’s well-by-well database shows that even if the Brent price drops to 50 USD/bbl, it could take up to 12 months before NAm shale output would drop as much as 500 kbbld. In order to maintain production levels in 2015 at expected exit-2014 levels of 6.4m b/d, Brent-equivalent oil prices can fall to as low as USD 60-65 per barrel (Exhibit 1).
The most robust plays are Eagle Ford and Bakken with no significant volumes at risk with current levels of realized prices. In the Permian however, where supply growth has been the strongest this year, we see that merely about 100 kbbld could be at risk over the next 12 months at current WTI Midland prices (Exhibit 2). The Permian oil-price-spread to Cushing and Brent/LLS has narrowed to -7 USD/bbl with the recent opening of the BridgeTex pipeline. The BridgeTex moves 300 kbbld from Mitchell County to Houston and additional take-away capacity is expected to come online next year. Our analysis shows that NAm shale liquids output has passed 6 MMbbld (including 1.5MMbbld of NGLs) during the third quarter of this year and it grows with a staggering rate of 1.5 MMbbld year-on-year in 2014 and 2015. This growth rate is surprisingly insensitive to oil price fluctuations at current price levels.
In today’s IEA Oil Market Report for October, the call-on-OPEC crude production to theoretically balance the oil market next year was lowered to 29.3 MMbbld vs. September 2014 OPEC crude production of 30.6 MMbbld. Downwards revised world oil demand growth of 1.1 MMbbld year-on-year compares with the UCube supply growth of 1.8 MMbbld for 2015 (Exhibit 3). In other words, markets may be even more oversupplied next year than previously thought. Either oil prices will come down further or a significant cut in supplies to the market has to be made, with the ball now firmly in OPEC’s court.