Sunday, September 13, 2015

Contrary to media hype US oil production is going down


If you believe all the recent stories about how Saudi Arabia is losing the price war it started against U.S. tight oil producers last year, the new Oil Market Report from the International Energy Agency offers a reality check. The Saudis are winning, though they're paying a heavy price for it.

The narrative about U.S. shale's resilience in the face of the Saudi decision to drive up production, prices be damned, centers on the American industry's ability to cut costs and use innovative technology to repel the brute force onslaught. There is a kind of David versus Goliath charm to this story, but the data don't bear it out. The IEA, the world's most respected independent source of information about the oil market, has changed its methodology for measuring U.S. output: It now polls producers, instead of relying on data from states. And the switch has caused the agency to revise production data for the first half of 2015, showing a noticeable slowdown. 

If anyone actually did a deep dive one would have noticed that most of the "shale revolution" was not based on new technology, or as one noted author wrote "Moore's Law applied to oil production", but cheap money and high oil prices. The fact is most of these shale players were never even cashflow positive at $100 per barrel. Now that the steep depletion is setting in on these shale wells there is not a willingness by lenders to continue to fund negative cashflow businesses. There are areas in the US where shale oil can be produced profitably at these prices but they are small compared to the media hype. What we are seeing is the Saudi plan working and the interesting thing to note will be at what price do we see equilibrium. The whole shale business was a Red Queens race funded by cheap and plentiful credit. The credit spigot is now shut and I expect oil production in the US to continue to decline.

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