Article / 18 April 2017 at 12:02 GMT

Why Aramco's 'oil shortage' is hardly likely

Managing Partner / Spotlight Group
United Kingdom
  • Saudi Aramco CEO Nasser says crude shortage coming
  • Middle Eastern producers have indicated that their ideal price target is $60/b.
  • There is no oil crisis; rather, more oil rigs are coming on line
By Stephen Pope

Amin Nasser, chief executive officer of Saudi Arabian oil firm Saudi Aramco, issued a warning on April 14 that there is a tremendous oil shortage looming. The basis for his belief is that he sees a $1 trillion decline in crude production investment since 2014...

...he is also talking up the market ahead of the Aramco IPO.

My first question to him would be that, if this were the case, why has crude oil fallen by 50.37% since trading at $106.83/barrel on June 20, 2014?
WTI
Sources: www.investing.com, Spotlight Ideas

At the Colombia University Energy Summit in New York on April 14, Nasser said:

...the large new production capacity and investment we will need in the future are lagging, and in fact missing in many cases... while the short-term market is pointing to a surplus of oil, the supply required in the coming years is falling behind...

He predicted that 20 million barrels/day in future production capacity is required to meet demand growth and offset natural field declines. This would vastly outweigh the 1.8m b/d that was agreed upon last year in an arranged output restriction.

The Saudi Aramco CEO added:

...that is a lot of production capacity, and the investments we now see coming back, which are mostly smaller and shorter term, are not going to be enough to get us there... this would lead to a shortfall whose duration is difficult to estimate...

To support his claim, Nasser pointed out that the level of combined inventories for countries in the Organization for Economic Cooperation and Development is flattening and poised to drop, thus leading to a tightening in the market.

US continues to ramp up production

That might be the case if the world purely relied on conventional crude oil supplies to feed its energy demands. In my view, Nasser is seeing the oil market as he might like it to be rather than how it really is. What he has overlooked is the fact that historically high oil prices drove experimentation so that the risk of long-tail market consequences could, by man’s own ingenuity, be pushed out further into our civilisation's future.

Oil prices turned lower on Monday as a continuous increase in US production caused concern that major oil producers would be unable to achieve a dent in the global supply glut despite their agreement to cut output.

On the New York Mercantile Exchange, US crude futures for May delivery fell from $53.18/b on Thursday to $53.02/b. As of 09:18 GMT today, the price is lower again by 0.46% to $52.42/b.

Late April 13, prior to the Easter holiday period, oilfield services firm Barker Hughes reported that its weekly US rig count rose by 11 to 683. That was the 13th straight weekly increase, and it took the total to its highest level in nearly two years.

Baker Hughes Source: Baker Hughes 

Investors have been concerned that increasing US output would derail major oil producers’ attempts to cut production. It appears that, as the oil price moves to slightly better levels, so it simply eradicated what one might regard as the barrier-to-entry cost for shale producers. 

The Permian Basin again led the growth of the nation’s drilling rig activity, with the Eagle Ford formation (Texas), Granite Wash (Texas and Oklahoma), and New Mexico each added more rigs to oil fields. With oil prices above $50/b since March 30, the growing Permian activity accounts for more than half of all the active oil rigs in the US.

In short, the DNA of the oil market this year is that the production cut by Opec, Russia and others has done relatively little to sustainably improve market conditions, or the price of oil. What we have seen is that older shale rigs that were mothballed in late 2014 have been brought online and the new wave of rig openings will, if oil prices retreat, simply in turn be mothballed... not closed completely.

So of course, while tensions in the Middle East or (heaven forbid) the Korean peninsula would clearly be reflected in near-term oil prices, the main driver that will be a consistent factor over time is the level of global demand.

Chinese industry
Chinese industry is not the growth engine it once was... Photo: Shutterstock 

The International Energy Agency said in a report last month that demand growth for oil is expected to drop from 1.6m b/d last year to 1.4m b/d in 2017, so raising further problems for producers as they try to boost prices.

The IEA said:

"...early indicators of first quarter of 2017 demand support this, with slowdowns seen in January in Japan, Germany, Korea and India..."

In terms of output, the IEA noted that Opec member countries cut production for the second month in a row. At the end of last year, they agreed to reduce production to ensure prices would go up. But the IEA has also noted that shale production in the US (and elsewhere in the world where similar geology and topographies exist) is likely to undermine the deal.

Opec obscures objectivity

Saudi energy minister Khalid al-Falih has insisted that there exists a consensus within the organisation to stabilise the oil market and that producers would do whatever was necessary to achieve that goal. 

We have hardly, however, seen a return to the oil price levels that many Opec and non-Opec nations need to make their economies run smoothly. Given this, it is frankly ridiculous for him to say that that it was too early to discuss whether extending the deal to cut production beyond June was necessary.

Why wait until May 25 for a cosy meeting and good dinner in Vienna? The reality is that any measure Opec and other state producers choose to take is simply providing succour to the shale industry.

There is no oil crisis, there is no shortage. The recent rise in oil seen over the past month is looking exhausted. It will only be extended by an exogenous event of dreadful consequence. If that happens, any short position I run will be cut and I will take a 180-degree opposite stance... but not until then. 

For now, oil price strength is just another selling opportunity.

Shale oil
Whatever Opec cuts, the US can supply. Photo: Shutterstock 

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas
3y
stphinkle stphinkle
I wanted to say that I think that this is indeed real. I have read Saudi's oil fields are too old and may be post peak-oil. The world will have to reduce fossil fuel consumption as a result. This confirms what Richard Heinberg and Matt Simmons have been saying for years.

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