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By Jennifer Warren on Sep 3, 2013 with 5 responses

How U.S. Oil Matters to Global Markets

Impacting Economics, Geopolitics and Markets

The U.S. is expected to spend about 8.5% of its GDP on energy in 2013. In 2008, when oil prices peaked, it was closing in on 10%. U.S. oil production provides a buffer to supply shocks — which happens frequently in the Middle East and North Africa, two key crude supply regions. In July 2013, disruptions to crude oil and liquids production were nearly 2.7 million barrels per day. Of the supply disruptions, 800,000 barrels were from non-OPEC nations and the other 1.9 million from OPEC, according to the U.S. Energy Information Administration (EIA). August is estimated at a 2.8 million shortfall.

The OPEC-related outages, which include Iran, Iraq, Libya and Nigeria, are considered to be the highest since early 2009. This has contributed to rising prices, from the year’s low of $97 in April to a high nearing $117 August 27th, after Syrian chemical weapons attacks followed on the heels of Egypt’s political turmoil. The causes of the outages in Libya were from labor disputes, while Iraq’s shortfalls originated from pipeline disruptions from violence; Iran’s woes stem partly from sanctions, and Nigerian oil challenges related generally to oil theft and infrastructure sabotage and degradation.

More Data Patterns

Consumption and production patterns have impacted price increases as well. The EIA projects that production in the second quarter of 2013 outpaced consumption, contributing to a global fuel stock build in the quarter versus a draw over the four years earlier. This trend is expected to reverse in the third quarter but will be 55% less than comparable quarters of the last four years. In July and August however, consumption outpaced supply. Overall, world consumption is to increase by 1.1 million barrels per day (bbl/d) in 2013 and 1.2 million bbl/d in 2014, with China owning the lion’s share of consumption growth.

Of the non-OPEC supply disruptions, Canadian, Sudanese, Syrian and Yemeni oil were culprits. Supply disruptions in Syria and Yemen are expected to continue through 2014, the short-term projection period. Overall, in 2013 OPEC supply is expected to decline by 620,000 bbl/d from 2012 production, with the Kingdom cutting back owing to the contributions of non-OPEC supply. Oversupply is not in any producer’s interest as prices at $100 have been able to support the balancing act inherent in supply and tolerated by demand.

ProductionGrowthDiff.001

Of OPEC producers, heavyweight Saudi Arabia controls the majority of the surplus capacity, which is expected to average 2.3 bbl/d in the second quarter of 2013.  The group’s fourth quarter capacity is expected to average 3.6 bbl/d, growing to 4.6 million in 2014. In 2004-2008, the reduced spare capacity of OPEC from a lack of timely capacity investment was a major part of the story when prices rose to around $140, but Asia’s demand growth also contributed to the tight-supply, high-demand picture. The supply-demand dynamics are more favorable than in earlier periods.

OPECSurplus.001

U.S. Oil Dominates

The newer capacity additions to the global oil supply chain originate largely from the U.S. Of the expected 1.3 million bbl/d for 2013 and 1.7 million in 2014, North America owns most of it — from U.S. tight oil formations and Canadian oil sands. The top-five states or regions, based on proved oil reserves, are Texas, Gulf of Mexico, Alaska, California, North Dakota and New Mexico. Together, North Dakota and Texas accounted for two-thirds of the net increase in total U.S. proved oil reserves in 2011. Total U.S. proved reserves grew to 29 billion in 2011. (Natural gas reserves grew to roughly 349 trillion cubic feet in 2011.) U.S. total annual oil production is expected to rise by 28% between 2011 and 2014 to nearly 13 million barrels per day. We imported 7.73 million barrels a day in June 2013, a 15% decline over 2012.

OilProdGrowth.001

Texas had the year-2011 largest increase in oil reserves (1,752 million barrels), driven by horizontal drilling and fracking in tight oil plays, such as the Eagle Ford Shale, the Wolfcamp Shale, and other formations. In 2012, however, Texas produced 583 million barrels, according to Texas Railroad Commission data, about 30% more than in 2011. Barring an economic or political shock, 2013 Texas production looks as if it will surpass 2012 production. Interestingly, producers are squeezing out more oil per well per day — 24% more in 2012 versus 2011. In 2011, development of shale plays in North Dakota’s Williston Basin accounted for most of North Dakota’s addition of 771 million barrels of crude oil and liquids reserves.

Surf the Winds

Though supply fundamentals look promising, price volatility from political turmoil in the Middle East has revealed its influence once again. While the OPEC cartel does influence prices to a large degree, the addition of the U.S. as a non-OPEC de facto incremental producer is new. When oil market prices react, it appears they also settle back down faster in light of fundamentals.

Increased U.S. oil production brings with it gains from supply diversification, and a form of greater energy market stability, if that’s possible. If ever there were a time of ‘great moderation’, a term economists use to describe the period of relative stability of the 1980s and ’90s from economic and monetary policy, the potential that technological advances in energy development brings to energy markets could provide a moderating influence. If policymakers would or could leverage this opportunity, they have the chance to help balance today’s energy needs with tomorrow’s ideal energy portfolio before peak resources arguments rise up again. America’s private sector is definitely riding these tailwinds at a time when good news on economic and security fronts is welcome.

  1. By SRSrocco on September 4, 2013 at 1:26 pm

    While I agree that an increase in domestic U.S. oil production allows more breathing room for the states, does it really materialize as “energy market stability?”

    Furthermore, even though the U.S. can slap itself on the back by increasing production of C & C from 5 mbd in 2008 to over 7.5 mbd presently, the annual decline rate in the country has moved up considerably. In 2008, the annual decline rate for the existing oil fields was approximately 5%… which means the U.S. had to bring on about 250,000 barrels a day of new supply each year to offset declines.

    However, when we factor in the huge 40%+ annual decline rates of shale (tight oil), the average yearly decline rate for the U.S. oil industry is now 10%+. Thus, we now have to bring on 750,000 barrels a day of new supply to stay flat.

    At some point in time here in the next year or two, these high decline rates are going to play havoc with the notion that the U.S. will be producing 10 mbd of C & C by 2020.

    By the way… I think your charts are great.

    steve

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    • By Jennifer Warren on September 4, 2013 at 2:53 pm

      The energy market “stability” is really more of a relative sort, in comparison to the absence of the incremental US production and given the Syrian geopolitical shake up. For sure, oil markets are volatile in nature, but it is interesting to see how, in spite of the supply disruptions of this summer, we don’t have the more severe price spikes of earlier years, especially as we are on the brink of military action. The U.S. strike can be read both ways: lending a hand to Middle East regional stability over time (read: cool it Iran); it can also lead to more instability if things get out of hand. On fundamentals, we have more potential for spare capacity vis-a-vis OPEC (the Kingdom really) and then add in U.S. increments. And of course, we have a reduced pace of demand from Ch-India.

      I take your point on the depletion issue. You are the second person in two days who has brought this up to me. I am brewing on this issue, trying to do some resources whispering. Slow going.

      Thanks about the charts!

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      • By SRSrocco on September 4, 2013 at 3:17 pm

        I agree with your point in the short term situation in the USA. By the way, even though China’s economic activity is not as robust as it would like, its oil demand hit a new record in June at 10.3 mbd — according to the Aug 2013 IEA report.

        Now, I don’t know what Chinese oil demand has been for July or Aug.. and it may have fallen in the past two months. However, the IEA does forecast China to stay at about that level (10.3 mbd) in 2013 and is forecasted to increase to 10.5 mbd in 2014.

        Interestingly, Available Net Oil Exports (Jeff Brown) have declined from about 40.7 mbd in 2005 to only 34.4 in 2012. Available Net Exports (ANE) are those from the top 33 oil exporters minus their consumption as well as Ch-India’s consumption.

        Thus, the remaining 155 oil importers in the world now have 6+ mbd less to import than they did in 2005. It makes perfect sense that the decline in Available Net Exports has had a very marketable impact on the price of Brent Crude — which has tripled since 2004… the year before the peak in ANE.

        steve
        SRSrocco Report

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        • By Jennifer Warren on September 4, 2013 at 3:34 pm

          All good points. Conservation in demand is key.

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  2. By Stacy Clarkson on September 4, 2013 at 2:33 pm

    Let the good times roll,back to ND this summer.

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