National Post (National Edition)
Shale oil glut not a big risk, analyst says
Low investment elsewhere limiting output
CALGARY • Fears of ballooning American shale oil production are overblown and years of under-investment in the global energy industry could lead to US$75 per barrel oil prices before the end of this decade, a top energy forecaster told a business audience Tuesday.
“The U.S. cannot drown the world in oil — it’s fundamentally impossible,” GMP FirstEnergy analyst Martin King told Canadian oil and gas executives at a breakfast event Tuesday.
Oil at US$75 per barrel by 2019 was “a reasonable longer-term price” as demand continues to grow and, outside of North America, oil inventories are falling, King said.
The energy analyst expects West Texas Intermediate oil prices to average US$58 per barrel this year and US$66 per barrel in 2018.
U.S. crude oil prices declined just under 1 per cent to US$48.40 per barrel on Tuesday on higher output in the United States, Canada and Libya.
U.S. production has surged on the back of liquids-rich basins such as the Permian light oil play in Texas, where production has grown significantly in recent months as oil prices improved.
“We think the data in the coming weeks and months should begin to put more of a positive spin on the resetting of the global oil market to more reasonable levels, but it will still take time,” King said.
Rival producers in Canada and other countries are concerned about the competitiveness of U.S. shale plays relative to their own assets and have been benchmarking their cost curves against those in the Permian.
“It’s been a tremendous turnaround,” King said, adding the massive volumes produced in the U.S. are the result of productivity gains and low costs.
However, the “law of diminishing returns” is taking hold and productivity gains are slowing in American shale plays, which will result in higher break-even costs.
“The productivities are starting to flatten out and that means higher costs at some point, which generally means higher break-evens,” King said.
Another issue weighing on Canadian equity valuations is U.S. President Donald Trump’s musings about a border adjustment tax and his growing list of North American Free Trade Agreement grievances with Canada.
King said Canada and the U.S. have the most productive energy trading relationship in the world and Trump “cannot, by himself, kill NAFTA by executive order.”
King’s view on oil is echoed by other influential forecasters.
Last week, the International Energy Agency warned that despite the impressive investment in U.S. shale, capital injections in other global basins had fallen to their lowest levels in 70 years and could lead to a supply gap in the coming years.
“The key question for the future of the oil market is for how long can a surge in U.S. shale supplies make up for the slow pace of growth elsewhere in the oil sector,” Birol said.
Production from American shale plays is set to grow by 2.3 million bpd by 2022, but that was masking a looming supply shortage, the IEA said.
“Every new piece of evidence points to a twospeed oil market, with new activity at a historic low on the conventional side, contrasted by remarkable growth in U.S. shale production,” IEA executive director Fatih Birol said in a release.
Citigroup analyst Edward Morse said in a research note Tuesday that he shares the growing consensus that the “oil market is rebalancing rapidly” but he’s more pessimistic in the medium-term, given the continued growth in not only U.S. shale but also from Canada’s oilsands.
Analysts expect OPEC members to agree on extending their production cuts, first initiated at the start of the year, during their ministerial meeting in Vienna on May 25. The deal would take away 1.8 million barrels from the market each day, which should help drain excess inventories.
“Prices this year have looked stable — Brent saw a high of US$57 and a low of US$50 — but should the (OPEC) petrostates extend their production cut Brent could hit US$65; a supply disruption in Venezuela, Libya and/or Nigeria could push prices above US$70,” Morse said.
“On the other hand, if the output cuts fall apart, prices could dip to US$40 or below,” he said.