OPEC supply surge swamps downturn in US tight-oil output

July 17, 2015
Confession: Early this year, your correspondent predicted that oil production from shales and other low-permeability formations would be declining by now and that oil prices consequently would be set to rebound. He was only half-right.

Confession: Early this year, your correspondent predicted that oil production from shales and other low-permeability formations would be declining by now and that oil prices consequently would be set to rebound. He was only half-right.

Production of so-called tight oil has begun to decline. But the oil price, after having shown signs of life at midyear, has sagged back below $60/bbl.

In projections for July versus June in the US Energy Information Administration's latest Drilling Productivity Report, three of four oily tight-formation plays showed output declines.

The changes aren't large: down 29,000 b/d in the Bakken play, 49,000 b/d in the Eagle Ford, and 17,000 b/d in the Niobrara and up 3,000 b/d in the Permian basin.

Until recently, though, production in all four regions was zooming.

Unforeseen early this year was a surge in production from key members of the Organization of Petroleum Exporting Countries.

Remember the shock expressed last November when the exporters' group said it wouldn't lower the group production target below 30 million b/d to defend the crude price? Total output by OPEC members has been at least 1 million above that level since February.

And it's rising. In its July Oil Market Report, the International Energy Agency estimates OPEC crude production in June at 31.71 million b/d, the highest monthly average since April 2012. OPEC output will rise more if Iran escapes sanctions under a nuclear deal still under negotiation at this writing.

Meanwhile, global oil demand was looking perky until Greece ran out of euros and the Chinese stock market drooped.

Market watchers have a word for this combination of supply and demand indicators: bearish.

An important question is whether the reversal of US tight-oil production represents merely a pause or the start of a decline as dramatic as the preceding increase.

Reasonable arguments support both alternatives.

Caution, however, should preclude speculation on the matter from anyone whose early-year forecasts turned out only half-right, which means half-wrong but falls less crushingly on the ego.