The stories above are of course important parts of the supply story. The fires in Canada shut in approximately one million barrels per day, though for only a short period. The Nigerian story is smaller in volume but likely a lot longer in duration, reducing production by about 400,000 b/d for now but with the possibility of much more, for a much longer time.
The point that gets missed as we look at these trees is that the forest is in jeopardy. As always, some context: the world produces and consumes roughly 95 million b/d. In the past year or two, oil production exceeded consumption by maybe 2 million b/d, which led to increasing storage levels around the world and, as we are all well aware, driving oil prices into the ground like a home made helicopter.
This imbalance has been slow to disappear, primarily because a significant number of new projects or wells have been coming on stream in the past year that had been initiated years ago. For example, in the US Gulf of Mexico, eight projects began production in 2015; of these eight, five were discovered in 2010 or earlier, some in 2004. These projects added an estimated 265,000 b/d, or 1/8 of the global surplus. The same phenomenon happens elsewhere in the world with large-scale projects, including Canada’s oil sands and pretty much every other offshore development.
So a proper and meaningful analysis of where we are with respect to market balancing should look beyond the close of trading today. When one does that, massive problems appear on the horizon.
If one is to discuss massive problems, Venezuela is currently the best conceivable example. The 12th largest oil producer in the world pumps out 2.7 million b/d and is in economic tatters. It is almost impossible to believe Venezuela will be able to maintain production when the country can’t feed its people, pay its bills, pay for printing of its own currency or attract capital after kicking out the multinationals. A 25 percent production cut would remove 700,000 b/d, and it would be a miracle if it only falls that much.
Up the continent a bit, Brazil is facing economic turmoil, political corruption scandals, and has pared back its 2020 production forecast by 1.4 million b/d since 2014 ‘s estimate and may cut it more. In Canada, the oil sands region in 2013 was forecast to be producing 5.2 million b/d by 2030; that’s been cut to less than 4 million b/and falling.
While longer term in nature, these three production sites alone could remove millions of barrels of daily production from forecasts by 2020. Many other producing areas are in a similar state. US production has been falling by 65,000 b/d every month and that may be accelerating. Pretty much every field in the world is getting by on less maintenance capital than was spent a few years ago, meaning natural production declines are almost certain to accelerate. At a very conservative 3 percent decline rate, 2.7 million b/d needs to be added every year just to keep production flat, never mind increasing to meet growing demand.
As a last nail in the coffin, to introduce yet another tortured metaphor, debt and equity capital for oil and gas exploration is a fraction of what it was several years ago. Cash flow available for reinvestment has similarly been decimated. As global finding and development costs have steadily risen (with some declines in the hottest areas of shale plays), ever more cash is required to increase global production – the cheap stuff disappeared long ago. This holds true for OPEC, for offshore, and for unconventional resources.
For the past few decades, potential problems like this never existed, because OPEC always assured us it was there to meet any increases in demand with their massive, idled production capacity (the International Energy Agency famously balances oil markets with a plug line item labeled “the Call on OPEC”). We now know that the supply cushion is not real, maybe never was, because Saudi Arabia is producing flat out with more rigs operating than ever before to lower prices and crush high-cost production schemes (idiotic Saudi comments notwithstanding: the Saudi Prince Mohammed bin Salman recently said Saudi Arabia could “produce 20 million barrels per day if we invested…but not more than 20 million.” Why does no one take exception to these stupid statements, particularly when Saudi Arabia has a proven track record of nonsensical claims? One reference will suffice, being the event in the 1980’s where Saudi’s reserves increased by 100 billion barrels almost overnight just before OPEC set production quotas based on reserve levels.)
Wildfires and pipeline outages do create production problems in the very shortest of time-frames, but from a global supply/demand perspective are largely piffle. Traders can worry about day-to-day fluctuations and live-action news sites can flap their arms trying to explain everything, but pay that no mind. What we should be worrying about are potentially massive shortfalls, as in 5-10 million b/d, that could happen in 1-3 years. The longer oil prices remain low, the greater the certainty that this shortfall will become a reality. Some shale production will recover quickly, but nowhere near enough to compensate for the global havoc being wreaked.