It’s Not All Its Fracked Up To Be

While the market starts to come to grips with the new sanctions on Iran and a larger than expected crude draw, as reported by the American Petroleum Institute (API), what should concern them is that U.S. oil production is not quite what it was fracked up to be.

The latest evidence of that fact is the Energy Information Administration’s (EIA) “Short-Term Energy Outlook” released yesterday. The EIA cut its crude oil production estimate for this year down to 10.68 million barrel a day from 10.79 million barrels a day. They also lowered their forecast for next year to 11.7 million barrels of oil a day down from 11.8 million barrels a day. 

While the decreases in their production estimate is rather modest, I believe that the downward revision may be the first of many. In the past, I have written how EIA methodology tends to overestimate production and we are now seeing the EIA start to move their numbers back down to reality. The EIA underestimates shale oil decline rates and it fails to account for the geographical and geological differences from well to well. Pipeline logistics and labor problems can be underestimated as well. We predict that we will see downward revisions in the coming reports.

That makes the next EIA statement even more bullish. The EIA said that “Even though EIA sees oil prices continuing to moderate in the coming months, global oil inventories are below five-year average levels and OPEC spare capacity is low, which could contribute to price volatility and possible price increases if supply disruptions occur.”

The moderating oil price, that the EIA sees, is from higher production from OPEC and Russia, compared with the first half of this year, and they are looking for spot prices to fall towards $70 per barrel by the end of 2018, as the market appears to be fairly balanced in the coming months.

The API provided a mixed bag for oil bulls and bears last night. While the Headline 6 million barrel drop in crude supply should have been very bullish. The fact that Cushing supply fell less than expected, 576,000 barrels and gasoline supply surging by 3.1 million barrels and distillates by 1.8 million barrels equalized the bull versus bear playing field.