Prodigious US shale oil production is often treated as a threat to deepwater. Won’t all this oil swamp demand? Many investment banks and government agencies forecasting oil markets feel that it could. The evidence, however, suggests differently. We have contended that the world is short of oil, and this shortage, rather than changes in habits or demographics, is driving decreasing oil consumption in the advanced countries. If the oil supply increases, then any overhang will be quickly absorbed. And that’s what the record shows: US product supplied (effectively, US oil demand) reached 20 mbpd in the last four weeks, up a whopping 1 mbpd (5.3%) from the same period last year. High oil prices have been aggressively suppressing demand in the advanced economies (and, to be fair, in the emerging economies as well). But if prices drop—as gasoline prices did in the US through much of November—demand comes roaring back to life.
But will it be enough to offset supply growth? Consider: US shales posted a blow-out year to November 2013, rising by 1.3 mbpd (three month average). The Canadians added nearly another 0.7 mbpd, according to the EIA, for North American production growth of an astounding 1.9 mbpd. And Brent oil prices have recently increased by a few dollars to $111 / barrel. In the coming twelve months, substantial production growth is expected. Part of this is fuelled by continued North American unconventionals growth of 1.3 mbpd.
Should we worry? There may be soft patches in the year ahead, but expect any excess supply to rapidly find a home, with prices returning to recent levels in a few months. Shales are no threat to deepwater.
Steven Kopits, Douglas-Westwood New York
+1 212 786 7506 or Steven.Kopits@douglaswestwood.com