Qatar’s Energy Minister, Mohammed Al Sada, came out last week and declared that oil prices have bottomed. He claimed that growth in non-OPEC crude has slowed and will remain flat and/or stable over the next quarter and will decline in 2016.
Current low prices have “caused oil companies to reduce their capital expenditure by almost 20 percent this year from $650 billion in 2014,” he said. “This trend of reducing investment in the oil industry could result in production shortfalls down the line.”
He went on to say that OPEC would increase production from 29.3 million barrels a day to 30.5 million bpd in 2016. Brent crude, a global pricing benchmark, closed Friday at $52.65 a barrel in London.
The U.S. Funding Problem
Part of Al Sada’s reasoning has to do with banks in the shale patch. You see, this is the time of year when oil companies go to the banks, produce their oil portfolio and try to lock in money for the next year.
The problem is that last year the collateral, proven reserves, were worth $115 a barrel. Today, not so much. The banks are under pressure to be conservative as no one wants to be holding the bag after a massive round of bankruptcies.
On the flip side, banks have a lot of money already invested and are seeking a return on said money. They can’t get it if they cut off funding and the production outfit goes fish-belly white.
International Energy Agency Says Production Will Drop
The IEA also thinks production will drop, saying: “Oil’s downward spiral to fresh six-year lows below $50 a barrel has dimmed the prospects for a recovery in U.S. drilling activity. Unless oil prices bounce back in coming months, supply is forecast to fall by 385,000 barrels a day next year to 3.9 million barrels a day.”
The oil companies’ answer to low oil prices has been to cut costs by switching to production over exploration. But you can only buy so much time from new strategies. Now last year’s hedges, which locked in the oil price around $70, are running out and oil companies, along with their banks, are looking for a lifeline.
For proof, look no further than U.S. shale companies locking in record hedges.
Reuters is reporting:
“U.S. shale producers jumped at the chance to lock in $50-plus crude for the first time in months… U.S. crude oil futures for December 2016 delivery… saw trading volume spike to a weekly record high of nearly 190 million barrels, twice as much as the average for the previous four weeks.
While banks want to see companies continue, they won’t want to make big bets on new production. Given that shale oil wells dry up at a rapid pace, natural attrition will mean that oil production will decline in the U.S.
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Production is Already Falling
Official data shows that, nationwide, U.S. output has already begun to decline after reaching a peak of 9.6 million bpd in April. The Energy Information Administration has predicted that output would reach a low of around 8.6 million bpd next year.
2016 will see non-OPEC producers make the biggest contraction since 1992.
The next year will see an event in the oil sector much like 2009 was to the market as a whole. To paraphrase Warren Buffet, when the tide goes out we will see who is swimming naked. And just as you could have made 500% returns from a host of companies if you were savvy enough to buy in 2009 — so will you be able to buy at a 15-year low in oil.
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
