Is Shale Driving Oil Higher?

Could the Shale Revolution be driving oil prices higher? It seems counter-intuitive – the U.S. is on course to be the world’s biggest oil producer by next year. And it was the additional shale supply that led to the 2014-15 oil collapse.

Yet, a growing chorus of industry voices is warning of an impending supply squeeze. This includes the Saudi Energy Minister, Khalid A. Al-Falih, who recently expressed concern about shortages of spare crude oil capacity. Last week David Demshur, CEO of oilfield services company Core Laboratories (CLB) forecast oil at $100 a barrel. He cited declining output in many key conventional plays globally, even while U.S. output is growing strongly. The International Energy Agency added their warning that, “…the world’s spare capacity cushion…might be stretched to the limit.”

Part of the problem relates to supply disruptions. Venezuela’s output continues to plummet because of chronic underinvestment. Renewed sanctions on Iran are impeding their exports sooner than expected. Saudi Arabia has promised to increase output to offset the loss of Iranian crude, but many question their ability to sustain output much above 11 Million Barrels a Day (MMB/D).

Meanwhile, global oil demand is expected to grow at around 1.5-1.7 MMB/D over the next year. Depletion of existing fields, estimated at 3-4 MMB/D annually, is worsening according to some observers. So the world needs at least 4-6 MMB/D of new supply to balance current consumption of around 98 MMB/D. Concern is growing of a shortfall.

Although blaming the Shale Revolution for a looming supply shortage sounds implausible, Shale’s lower risk profile is drawing capital investment away from conventional projects. You can see this in Exxon Mobil’s (XOM) five year plan to commit $50BN to North American oil and gas production. You can also see it in the dramatic decline in the size of large projects. As we’ve noted before (see The Short Cycle Advantage of Shale) conventional oil and gas projects take far longer to return their capital invested than shale projects.

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