The market continues to focus on geopolitical risk in Libya, Russia and Iraq. Libya expects to export more oil after an agreement was made with rebel forces. However, a heavier-than-
The IEA and the U.S. Energy Information Administration (EIA) predict that the “revolutionary”
The production decline rate of hydraulically fractured tight oil wells is around 40 percent per year in the Eagle-Ford and Bakken fields. This mean oil drillers must replace 40 percent of last years’ production capacity each year before they can increase the overall rate of production. The average annual production decline rate for existing wells worldwide is around 4 to 5 percent. The IEA does not appear to be concerned that shale tight oil declines 10 times faster than conventional oil production.
Between 2012 and 2013 the decline in production from legacy wells in the Bakken and Eagle Ford shales increased from 98,000 b/d to 138,000 b/d. Some experts believe an increase in production for these two fields will unlikely keep up with the rate of decline within the next 12 to 18 months, and that U.S. shale oil production will no longer be growing.
Saudi Arabia, as the world’s swing producer, will probably have to sustain production above 10 million barrels a day as it meets the summer surge in domestic demand and losses in Iranian exports.
Iran’s Ayatollah Ali Khamenei has rejected pressure by the U.S. and its allies at ongoing nuclear talks in Vienna to force Iran into making concession, saying the West seeks to greatly restrict his country’s uranium enrichment program. The Khamenei said in a state television broadcast that the U.S. goal at the nuclear talks is to convince Iran to limit its uranium enrichment capacity to 10,000 Separative Work Units (SWU) while Tehran needs at least 190,000 SWUs.
Khamenei rejected demands from the West to shut down Iran’s underground Fordo enrichment site because it is not accessible to damage from air attack. He said our team will not agree to close Fordo and allow the rights of the country and the nation’s dignity to be encroached upon.
Relying on forecasts by the International Energy Agency (IEA) or the U.S. Energy Information Administration (EIA) is often a mistake, because they are frequently wildly wrong. In 2004 EIA predicted oil prices would be around $25-$30 per barrel in 2013. Oil was more like $100 per barrel.
Because IEA and EIA are government run, it is often politically uncomfortable to forecast price spikes. In addition black swan events such as an Israel attack of Iran, or an ISIS bombing of an Iraq oil field are difficult to predict.
Also speculation can also be factor. The psychology in buying and selling bubbles during quantitative easing or boom periods can cause speculative demand to override economic fundamentals of supply and demand.
The rise of oil markets such as the NYMEX in 1983 has been revolutionary chiefly because it has allowed for non-fundamentals to more easily affect oil prices. This explains, in part, why oil prices have shifted so radically over time from a historic low of $10 per barrel in 1998 to highs near $147 in summer of 2008 or even more dramatically from $50 in February 2007 to over $147 per barrel in July 2008.
It is hard to ignore that oil prices were four to five times higher in the last decade than in the mid-1980s and through the 1990s. This indicates higher speculation in oil markets from proprietary trading by banks and hedge funds. However, it also reflects the higher cost of unconventional oil production versus conventional production. Hydraulic fracturing of shale oil costs $70-$80 per barrel to produce versus $20-$30 per barrel for conventional oil. Conventional oil production has peaked.
During the time of the Babylonian King Nebuchadnezzar he found that government employees, forecasters, astrologers and magicians could not tell the future. The prophet Daniel told him only God knows the future. He said that God removes kings and raises up kings, and gives wisdom to the wise, and knowledge to those who have understanding. Predicting the future price of oil can be a fools errand, however over the long term we can expect a growing demand for oil from the emerging markets of China and India. We also know that oil production peaked in the U.S. in 1970, and it is going to be difficult to produce 9.6 million barrels a day again in the U.S. Some critics believe predictions by the EIA and the IEA of much larger U.S. and Iraq oil production in 2020 are overly optimistic.
For more information on current events in the Middle East and the clash of worldviews see:
Disclosure: I am long Energy XXI (Bermuda) Limited, along with investors Kyle Bass, Leon Cooperman, and asset manager Black Rock. Trading symbol EXXI.
Dr. Stephen Johnston
Dr. Stephen Johnston