IEA Reports on January and Looks Ahead!

This week, we were going to address the sand supply, demand, and feedback we received on WWIII in Wisconsin.  More on that next week…the new IEA report is timely and worth reviewing. 

The IEA recently released a report indicating that the U.S. is expected to remain the world’s top source of oil supply growth up to 2020, even with recent reductions in prices.  The report indicates that the U.S. is defying expectations of a more dramatic slowdown in shale growth.  Here is the page for the public version of this report:

Interpretation:  U.S. producers kept producing well past the anticipated break even points, driving oil prices much lower than OPEC expected!

In case you don’t know, the IEA: International Energy Agency (Not to be confused with the EIA: Energy Information Administration) was founded in response to the 1973/4 oil crisis.  Its initial role was to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets.  While this continues to be a key aspect of its role, the IEA has expanded to providing statistics, analysis and recommendations.

As far as oil price projections, IEA is predicting market leadership changes too.   Ms. van der Hoeven, IEA Executive Director, says that while OPEC may win back some customers with lower prices, it would not regain the market share it held before the 2008 financial crisis.  The report indicates OPEC’s market share has fallen to less than 30% this year from more than 40% in 2008.

This reflects over 10% loss in market share in six years for OPEC.  If I am Saudi Arabia or any other OPEC country, it is time to fret.   Let’s take Saudi Arabia:  some reports indicate that they need oil around $90/b to break even to fund their government spending.

If oil is at $50/b, they are short $40/b.   Metaphorically, let’s say they used to sell 10 bpd but they lost 10% of market share, so now they sell 9bpd.  Before, they were making $1,000/day.  Now, with reduced market share and lower oil prices, they would be making $450/day.

This is key…….even when prices recover to the $90 range, according to the IEA report and prediction that OPEC will not recover market share, Saudi Arabia will still be under water.


Keep in mind that Saudi Arabia is in better financial position to cover their obligations and make further adjustments in government spending.  But, other countries are already in crisis and don’t have other options.

The IEA also predicts growth of U.S. light, tight oil (LTO) will initially slow to a trickle but regain momentum later.  Total U.S. supply should increase to 14mbpd in 2020, with most of the expansion in LTO.

I don’t want to gloss over the projection on U.S. production.  According to other reports:  Total U.S. crude oil production averaged an estimated 9.2mbpd in January. Considering IEA projections, existing numbers would increase from 9.2mpbd to 14 mbpd in the next 6 years.  That is an increase of 4.8mbpd!

Just for reference, total U.S. production during the first quarter of 2012 topped 6mpbd.   Just two years later, we increased to 9.2mbpd, a 3.2mbpd difference.

In this scenario, U.S. production must keep growing to meet these projections!

According to IEA:  “The price correction will cause the North American supply ‘party’ to mark a pause; it will not bring it to an end.”

This is further analytical perspective that U.S. oil production is experiencing a temporary bump in the road.  Here are additional highlights of the report that are interesting:

Global supplies fell by 235 kbpd in January to 94.1 mbpd on lower OPEC and non-OPEC production.
Reductions in capital expenditures have cut projected 2015 non-OPEC supply growth to 800kbpd.  US 2015 production is seen 200kbpd lower than in last month’s Report, at an average 12.4mbpd, with most of the cuts in 2015.

OPEC crude oil output fell by 240kbpd in January to 30.31mbpd, led by losses from Iraq and Libya.
Output from Saudi Arabia, Kuwait, Angola and Nigeria edged up. Downward revisions to the non-OPEC supply growth forecast for 2015 have raised the ‘call’ on OPEC to an average 30.2mbpd – just above the group’s official target of 30mb/d.

The global oil demand growth forecast for 2015 is unchanged from last month’s Report, at 0.9mbpd, bringing average demand for the year to 93.4mbpd.
Growth is expected to gain momentum from a modest 0.6mbpd gain in 2014, on a slightly improved macroeconomic outlook.

And finally, the report closes on this note:

The swiftness of LTO supply cuts will help put a floor under prices, just as their reversal when prices rebound in earnest, might put a ceiling over them.

U.S. Drillers have territory to cover in the next five years to take market share and partake in supplying increased demand.  Get ready…get ready!

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