From 2011 to 2014, we observed the largest oil supply shock in history: US shale oil production was adding more than 1 MMbbl/d every year, or more than the growth of global demand for oil.
OPEC faced a risk of critical reduction in market share. An initial cut of 2 MMbbl/d from the collective quota during 2014 and 2015 would be needed to keep oil prices at the 2011-2013 level of US$110/bbl. On the other hand, such drastic cuts would obviously support a continuous growth of US shale oil production as less than 5% of shale oil recoverable resources are extracted to date (Rystad Energy estimate).
The pain limit for US shale drillers was reached when US oil prices dropped below $50/bbl. In the first week of 2015, with fresh and down-sized budgets, oil companies reduced horizontal drilling for oil for the first time also in the core plays Bakken, Eagle Ford and Permian where rig count went down from 700 rigs to 675 rigs last week. A minimum of 500 rigs drilling horizontal oil wells on these plays is needed to keep production flat on the plays.
Without the invisible hand of OPEC, how fast will oil supply adjust and what is the new balancing oil price?
Image: Global liquids supply cost curve. Chart from Rystad.
Based on our UCube database with 65,000 global fields, acreages, discoveries and prospects, we have looked at several ways to adjust the oil supply by oil companies. Analysis has shown that the three main effects are:
The synthesizes of the above analyses indicates a strong resilience of non-OPEC production in the short run, but also that oil prices far below $90/bbl are clearly unsustainable in the long run. So with sustained low oil prices and largely committed capex, we expect 2015 to be an extraordinarily tough year for the international oil companies.