Peak Oil Review: A Midweek Update – 2 June 2016

The major news of the week was an indication that OPEC might establish a production cap during its meeting on Thursday. If a meaningful production ceiling is established, it would represent a major change from recent Saudi policy. Many doubt that Tehran would be willing to go along with a significant cap until it has increased its exports considerably. The news of a possible cap sent prices higher on Wednesday with Brent closing at $49.72 and New York at $49.01. Technical resistance at the $50 level, the size of the global stockpile, and uncertainty about the course of production has prevented oil from moving much above this level.
 
There is still much disagreement as to where prices are going in the next few months. Having seen oil prices nearly double since late February, many do not see further increases in the immediate future.  The 1 million b/d Alberta production outage is being eliminated; exports from Libya are back to about where they have been in the last year or so; and while Venezuela is approaching societal collapse, so far its oil production has been holding fairly steady. In Nigeria, however, oil production continues to drop rapidly as a new generation of insurgents in the delta is tearing up more onshore oil production facilities every day.
 
The weekly stocks report has been delayed to Thursday due to the holiday, but the API survey released Wednesday suggests that crude inventories might have increased by 2.35 million barrels despite the 1 million b/d outage in Alberta. Canada had fairly large stocks of tar sands crude in storage depots away from the fires and appears to have been able to keep up exports to the US during the fires.  
 
While the price of oil remains murky for the next six months, many are beginning to talk about the impact of the massive reductions in capital spending on oil and gas exploration and development that has taken place in the last two years.  It is starting to sink in that if oil prices remain below $100 a barrel for the next few years and global demand remains in the vicinity of the 35 billion barrels a year, three or four years from now we are likely to see global production falling in the next decade. Discovery of new oil last year was at the lowest in 60 years and well below the rate at which it is being consumed.
 
The only real hopes for increased production, outside of the volatile and vulnerable-to-global-warming Middle East are shale and deepwater oil. Both of these sources are likely to become increasingly expensive to produce. While a few shale oil producers are claiming profitability at $50 a barrel, they currently are relying on temporary factors such as a backlog of already drilled wells; drilling only in the most productive sweet spots; and by forcing their service suppliers to do business at a loss. All this says that the outlook for shale oil in the next decade may not be as bright as many are forecasting.  
 
Deepwater projects will have problems in the next decade too. These projects are very expensive, technically complex, and take years to complete. Only the largest of the international oil companies have the resources to undertake deepwater drilling, which is only profitable if oil prices are well above $100 a barrel – some suggest $150. Today about 30 percent or 22 million b/d of global oil production comes from offshore. While these wells do not deplete as fast as shale oil wells, they do so at a much faster rate the conventional land wells. All this suggest that five from now oil production may be dropping rapidly, and oil prices may be unaffordable for many.