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
Oil prices are on the rise; driven by a strong U.S. economy, OPEC production cuts, plunging output from Venezuela but also as the fact that there are signs that the U.S. shale revolution may not quite deliver on the Energy Information Administration’s (EIA) more optimistic forecast.
The latest warning comes from Energy Analyst legend Philip Verleger, who sees a quick decline in U.S. oil production. He says that despite the fact that the U.S. Energy Information Administration ( EIA) sees production output from U.S. wells rising from 11.9 million barrels per day at the end of 2018 to 13.5 million barrels per day by the end of 2020, that it may come as a surprise to learn that production at the end of 2020 may have actually decreased from December’s 11.9 million barrels per day level to between 11.3 and 11.5 million barrels per day. This lower figure represents the production level that should be expected given the financial activity of the independent firms behind the shale output surge.
He warns that the coming decline will occur mostly in the areas that have produced the most growth over the last five years: the Bakken, Eagle Ford, Haynesville, Julesburg, and Permian basins. The production drop will occur because the firms operating there have been forced by monetary constraints to cut back on drilling. The recent reduction in debt and equity issuance by these firms assures the output decline. He said that stressed shale firms will enter hedges as soon as the size of their new discoveries is delineated. The futures sales will likely occur when wells are completed and before they are fracked to ensure the company can cover costs and perhaps profit, even if prices fall. He points out that data on the issuance of debt and equity by shale firms and their positions in futures markets thus provide an indicator of their future production. This data points to a possible large decline in output.
He says that a February 24 Wall Street Journal article, by Bradley Olson and Rebecca Elliott, should warn every one of the impending slowdowns. A key graph presented there shows that debt and equity issued by U.S. shale producers declined to $22 billion in 2018, which is less than half the amount raised in 2016 and one-third the amount raised in 2012. When one compares the total debt and equity issuance to Lower-48 onshore production lagged two years, one finds a close relationship. Lower-48 onshore output rose from three million barrels per day to 8.5 million barrels per day in 2018. However, the drop in the issuance of equity and borrowing suggests this production could fall by a third to six million barrels per day by the end of 2020 if this relationship holds.
We know that OPEC is holding tight. The Saudis have made it clear that not only are they sticking to production cuts, they expect to over comply to cuts all throughout April and may cut even more in the next few months. They are also making it clear that they have no intention in bailing out Donald Trump and moving to replace the loss of Venezuelan oil. Bloomberg News reports that U.S. Energy Secretary Rick Perry said the decline of oil output from Venezuela will continue until there’s a change of leadership. The International Energy Agency said Monday it expects Venezuelan output to fall to 800,000 barrels a day this year. Power outages in the nation have slowed production that has already been dropping in the aftermath of U.S. sanctions on Petroleos de Venezuela SA, the state-owned oil company. “I think that until there is a change of leadership there, that being able to get their oil and gas production back in a positive direction is going to be threatened,” Perry told reporters at a press gathering during the CERAWeek by IHS Market conference in Houston. The U.S. and dozens of other nations support opposition leader Juan Guaidó, who has challenged President Nicolas Maduro’s government by declaring himself interim president, while Maduro refuses to step down. “The United States stands ready to assist the people of Venezuela to get that country back in a positive direction from the standpoint of their economy, and that is based upon their oil and gas industry,” Perry said. “Hopefully, that will occur soon, and the future of Venezuela can be positive again. But that will not happen until, from my perspective and I think in the administration’s perspective, until there is a change in leadership and Maduro’s gone.”
Oil should also get support by private forecasts that are showing a decline in Cushing Oklahoma oil stocks as well as talk that we could see a trifecta of drawdowns in Crude, Gasoline and Distillate. Strong U.S. demand continues to be a big story. In fact, for the first time in 20 years, according to the International Energy Agency, the U.S. led the world in oil demand growth, rising by 500,000 barrels a day. The reason is clear, the U.S. economy was the strongest in the world and that demand growth reflected that fact.
My Buddies at GasBuddy Patrick DeHaan, put out a new report that says that “aggressive driving habits like speeding, rapid acceleration and braking is the quickest way to waste gas and lower gas mileage by as much as 40 percent, costing drivers up to an extra $477 per year in fuel consumption.” While that may be true, as far as I am concerned, when I am waiting at a light, I wish I would have one of those aggressive drivers ahead of me. I usually get the guy who is on his cell phone texting, totally oblivious to the fact that the light has changed. Where I then of course politely jam on my horn, and usually am greeted with a “you are number 1” hand signal. GasBuddy reveals the cities with the most aggressive drivers in the United States, causing them to make more frequent trips to the pump are 1. Los Angeles 2. Philadelphia 3. Sacramento, Calif. 4. Atlanta 5. San Francisco 6. San Diego 7. Orlando, Fla. 8. Detroit 9. Austin, Texas 10. Las Vegas. Come on Chicago Drivers! You are Not Trying! PS if you are driving slow get out of the Left Lane!
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