Sat, Sep 12, 2015 page15

• IEA sees US shale oil output shrink

  • Bloomberg
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  US shale oil production could drop 9 percent next year as a crude price below US$50 a barrel “slams brakes” on years of supply growth, the International Energy Agency IEA said.

  “Oil’s downward spiral to fresh six-year lows below US$50 a barrel has dimmed the prospects for a recovery in US drilling activity,” the Paris-based IEA yesterday said in its monthly market report.

  “Unless oil prices bounce back in coming months, supply is forecast to fall by 385,000 barrels per day next year to 3.9 million barrels a day,” IEA said.

  The forecast is a turnaround for the IEA, which only two months ago predicted US shale oil output would increase by 60,000 barrels per day next year.

  Oil supply from producers outside OPEC are likely to make the biggest contraction next year since 1992 as Saudi Arabia’s strategy to defend market share by pressuring rivals with lower prices takes effect, according to the report.

  Drilling activity and output levels are unlikely to rebound following the cuts in oil producers’ capital spending, the agency said.

  The number of oil rigs active in the US has fallen by almost 60 percent over the past year, standing at 662 in the week to Sept. 4, according to Baker Hughes Inc.

  This has translated into five weeks of decline in US production, the longest retreat in almost 11 years. Output currently stands at 9.13 million barrels per day, a 5 percent drop from the all-time high of 9.61 million reached on June 5, according to US Department of Energy data.

  Continuous investment is needed for production to keep flowing from US shale oil wells, which have “steep decline rates,” the IEA said.

  Output per well tends to decline by an average of 72 percent from initial production rates within 12 months of the well having started, forcing operators to keep drilling to offset the decline.

  Drilling and completion of wells is to drop by a further 20 percent to 70 percent next year, the IEA predicted.

  “Impressive increases in productivity” have helped offset the slowdown in drilling and tempered ensuing drop in production, it said.

  US shale oil producers would also be the first ones to respond should market conditions improve, the IEA said.

  However, the global surplus of oil is even bigger than Goldman Sachs Group Inc thought and that could drive prices as low as US$20 per barrel.

  While it is not the base-case scenario, a failure to reduce production fast enough might require prices near that level to clear the oversupply, Goldman said in a report yesterday.

  The bank cut its forecast for Brent and WTI crude through next year on the expectation that the glut could persist on OPEC production growth, resilient non-OPEC supply and slowing demand expansion.

  “The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist next year,” Goldman analysts, including Damien Courvalin, wrote in the report.

  “We continue to view US shale as the likely near-term source of supply adjustment,” analysts said.

  Goldman trimmed its estimate for next year’s West Texas Intermediate (WTI) to US$45 per barrel from a May projection of US$57. The bank also reduced next year’s Brent crude prediction to US$49.50 per barrel from US$62.

  WTI for next month’s delivery fell as much as US$0.45, or 1 percent, to US$45.47 per barrel on the New York Mercantile Exchange and is heading for a weekly decline. Prices are down 14 percent this year. Brent for next month’s settlement is 1.7 percent lower this week.
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