DB challenges IEA view of US oil output

A recent projection that the US will become the world’s leading oil producer after 2020 has drawn a challenge from analysts at Deutsche Bank (OGJ Online, Nov. 13, 2012).

The International Energy Agency made the projection in its World Energy Outlook 2012, which cited a “surge” in production from unconventional resources such as shales and tight formations in the US and heavy oil in Canada.

DB Research Analysts Paul Sankey, David T. Clark, and Silvio Micheloto and Research Associate Winnie Nip say in a Nov. 14 report that the IEA’s projection doesn’t sufficiently account for price, costs, and returns.

Price assumptions in IEA’s three assessment scenarios, defined by government policies, vary from the base-case level of $120/bbl in 2020 by only about $7/bbl, the analysts point out.

“That, we would say, given the margin of error in all things energy statistics, is as good as the same price,” they write.

Also, the IEA projection makes no assumption about whether the US ban on crude oil exports will remain in place. The DB researchers think it will, leaving the US crude price to “continue its total disconnection from the global oil price—currently $22/bbl discounted for the same quality barrel of crude.”

With demand for light, sweet crude falling along with gasoline demand in the US, supply growth implied by IEA of 600,000 b/d/year “will overwhelm demand, and so price, and so returns, and so spending,” the analysts say. “The growth cannot be sustained.”

The analysts think the spread between Brent and West Texas Intermediate crude prices will settle between the Saudi oil price target of $110/bbl for Brent, limited on the high side by Chinese demand destruction at $130/bbl, and the marginal cost of US oil supply of about $90/bbl for WTI, possibly $100/bbl in the longer term. The WTI-Brent price discount will be $10-20/bbl.

“Based on the relative performances of the stocks this year, US exploration and production investors are losing tolerance for value destruction,” the analysts say. “In short, a prediction that the US will become the world’s largest oil producer is a self-defeating proposition.”

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