Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
U.S. oil production is at a record high but supplies of oil keep falling. Did you stop to wonder why? Well there are many reasons, such as record demand, but a larger issue has to do with shale oil. Yesterday’s oil initially rallied on a report that Saudi Arabia was raising crude prices for customers showing that they are confident about demand and not worried about losing market share. It later fell on a report by Genscape that supply in Cushing OK rose 1.57 Million barrels since last Friday. Yet, warning signs about shale not only about production, but bottlenecks in the Permian shale basin and reports of high decline rates are raising concerns that the world may be putting too much faith in shale to keep the world supplied with oil.
Let’s talk bottlenecks first. Reuters is reporting that while the Permian basin in Texas is leading the way in U.S. oil production the increase in production, is causing major bottlenecks as pipelines transporting the crude have filled up more quickly than expected. This has caused a drop-in price and could pose a threat to investment and future production. Pipelines have filled to near-capacity and with few new pipeline projects scheduled for this year, producers may be forced to slow drilling, or even shut down active production.
Reuters says that production in the Permian Basin has hit a record 3.08 million barrels a day in March, nearly a third of overall U.S. production of 10.4 million bpd, according to the Energy Information Administration (EIA). Now with Prime land already drilled, it seems that Permian drillers are branching out into relatively less-profitable areas of the region according to John Zanner, energy analyst for RBN Energy. “As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast,” he said.
Yet, this is just part of the problem. In the rush to produce shale are we going to be able to sustain U.S. production growth over the long run just relying on the Permian? Even if we had pipelines to get the oil out, there are concerns that we may be seeing signs of weakening Permian production promise.
Blue Quadrant Capital Management writes in Seeking Alpha that production decline rate in the Permian has “accelerated quite notably over the past 12 months. As we well know, shale wells have a very high initial decline rate. In many cases, the production output reported by a new well in the first month can decline by 60% in the following 12 months, before flattening out somewhat. The annualized monthly decline rate is currently at around 2.34mn bpd or 75% of total current production. A year ago, this ratio was just 62%”.
This is a problem because the U.S. and world has put all their eggs in the Permian production basket. As Blue Quadrant points out America will essentially account for almost all the expected growth in global oil supply in 2018 and 2019. If they fail to deliver the world will be left short of oil.
According to the EIA’s Short-Term Energy Outlook publication, production growth from North America will essentially account for almost all the expected growth in global oil supply in 2018 and 2019. Most of that growth is in the Permian and if these decline rates keep up the world may be short of oil in a few years. Blue Quadrant says this raises the risk of a “black swan” event in the global oil market if productivity or production trends in the Permian unexpectedly deteriorate.
Questions? Ask Phil Flynn today at 312-264-4364
A Subsidiary of Price Holdings, Inc. – a Diversified Financial Services Firm. Member NIBA, NFA
Past results are not necessarily indicative of future results. Investing in futures can involve substantial risk of loss & is not suitable for everyone. Trading foreign exchange also involves a high degree of risk. The leverage created by trading on margin can work against you as well as for you, and losses can exceed your entire investment. Before opening an account and trading, you should seek advice from your advisors as appropriate to ensure that you understand the risks and can withstand the losses.
The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or futures. The Price Futures Group, its officers, directors, employees, and brokers may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Reproduction and/or distribution of any portion of this report are strictly prohibited without the written permission of the author. Trading in futures contracts, options on futures contracts, and forward contracts is not suitable for all investors and involves substantial risks. ©2018
Jobs today and trade war fears and Federal Reserve Chairman Jerome Powell will drive the market today. So stay tuned to the Fox Business Network, Call me at 888-264-5665 email me at email@example.com.
Questions? Ask Phil Flynn today at 312-264-4364