Shale Oil Stocks: Do Not Count On A Major Slowdown In The U.S. Oil Production Growth

Nov. 06, 2014 1:40 PM ETAPC, CLR, DVN, EOG109 Comments
Richard Zeits profile picture
Richard Zeits
10.45K Followers

Summary

  • The presumption that North American shale oil production is the “swing” component of global supply may be incorrect.
  • Supply cutbacks from other sources may come first.
  • Growth momentum in North American unconventional oil production will likely carry on into 2015, with little impact from lower oil prices on the next two quarters’ volumes.
  • The current oil price does not represent a structural “economic floor” for North American unconventional oil production.

The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.

The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC's cost to produce is low).

Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.

Oil Price - The Economic Signal Is Both Loud and Clear

The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the "stability band" that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in "today's dollars.")

(Source: Zeits Energy Analytics, November 2014)

Given the sheer magnitude of the recent oil price move, the economic signal to the world's largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as "ordinary volatility," giving the hope that the current price level may be sufficient to induce some supply response from the largest producers - in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.

Are The U.S. Oil Shales The Culprit?

It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale

This article was written by

Richard Zeits profile picture
10.45K Followers
Richard Zeits is an Oil & Gas industry analyst and consultant. His background includes fourteen years as Energy industry-focused investment banker, portfolio manager and senior investment analyst with bulge bracket firms in New York. Zeits Energy Analytics use elaborate proprietary analytics and data bases to provide in-depth industry research, market intelligence, and forecasting.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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