Crude prices are well over $55, so where is all that shale oil?

There are approximately 80 countries that constitute the non-OPEC supply group, but what is remarkable is that over the past 10 years, nearly 100 percent of all production gains were attributable to the US alone and, more specifically, crude from shale formations.

Just about everyone reading this has heard about tight sands, but most do not realize that production from shale oil wells has a comparatively short life. Geologically, shale oil production is actually referred to as a “burst” because of the limited duration of output from a given well. Part of the confusion, we believe, relates to shale natural gas, whose wells have a relatively long life of 25-30 years, whereas shale oil wells have a life of about five years.

A key view we have shared with clients for years was that US shale oil was never going to be the solution to the world’s need for increased crude supply. Granted, as you are reading this, we face the 2021 UN Climate Change Conference meetings in Glasgow, with consuming nations essentially preaching the necessary death of coal and oil. But as we have noted in previous columns, the world quitting oil (or coal for that matter) in the next one or two decades is unrealistic. For oil, about 74 percent of global demand is as a transport fuel, and nothing exists of scale that could serve as a substitute.

So, here we sit with crude prices near the $85 per barrel mark. We can share with you that just 10 months ago, most believed it impossible that oil prices would be able to sustain a level above $60 per barrel. The single largest reason behind that view was a belief that US shale oil production would come “roaring back.” Obviously, we did not share that view, and the data has shown as much.

Most should recall that a year ago, it was believed that US oil production in 2021 would grow by about 1.1 million barrels per day. That projected rate was more than double our own forecast, and we thought we were erring on the high side.

A key view we have shared with clients for years was that US shale oil was never going to be the solution to the world’s need for increased crude supply.

Michael Rothman

As things stand, US oil production in 2021 will come in about 150,000 barrels lower than 2020’s average. For 2022, we believe we are facing the same sort of issue, with current consensus projections for US oil supply (and non-OPEC in general) appearing too optimistic. Keep in mind that since the 2014 high watermark, global capital expenditures for oil production have been cut by a collective $2.2 trillion.

As a general comment, the oil market outlook post-pandemic will, we believe, be characterized by two key trends. The first is a full recovery in global oil demand and then annual growth that will run at about half the rate of global economic activity. The second key trend, which relates to the above discussion, is a non-OPEC supply response that will be disproportionately small compared with the demand rebound. This looks to place increased pressure on OPEC’s production capacity and inventories, which have already been whittled down. When you place all that in the proverbial blender, it translates into meaningful upward pressure on crude prices, an outcome that will greatly enhance the income of petroleum exporters.

• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life,” which is available on Amazon.com.