Oil prices are getting a wakeup call after a lowering of the US oil production outlook, a report of a major drop in US oil supply and a warning by S&P to oil majors cut to back more and reduce debt levels or face downgrades.
The Energy Information Administration (EIA) is lowering the outlook for US crude oil production because of a revised oil price forecast that is $2 to $4 per barrel lower for late 2017 and during 2018 than the prior forecast that will make it less profitable for some U.S. producers to drill for oil. The EIA said that US crude production will average 9.9 million barrels a day, down from a previous forecast of 10.1 million barrels a day in what I predict will be the first of more production downgrades in the future.
As I have written before, the rush to add oil rigs by oil companies at a frantic pace seemed not to consider the well head profitability as well as the logistics for producing this shale oil. While the oil market has been so fixated on rising oil rig counts, the increase in uncompleted oil wells should have been raising some concern. What we are now seeing is a pullback in shale oil production that will hold back US oil output of shale until the economics start to make more sense. That may take a while as the logistical issues of bringing drilled but uncompleted wells back on line will not give us the amount of oil production that the market has been expecting.
The EIA does forecast production to average 9.9 million b/d in 2018, which would mark the highest annual average production in U.S. history, surpassing the previous record of 9.6 million b/d set in 1970. Even though US oil production may break a record in a few years, the fact that the EIA is counting on the US to account for 90% of the globes production growth in the coming years, this reduction in production should be worrisome. OPEC cuts are expected to be extended and reports that both Libya and Nigeria will agree to a production quota puts the fate of global oil prices in the hands of US producers. A fate that looks shaky as US shale producers are already pulling back and reports of investment capital for shale is drying up.
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