U.S. Oil Production To Increase In 2017
U.S. crude oil production fell by 6% in 2016 to below 9 million b/d. Yet, with OPEC compliance at a reported 90% and above, and with oil prices range bound at $51-57, U.S. oil output should rebound this year. At nearly $54, EIA expects oil prices in 2017 to be about $10 higher per barrel than they were last year (here).
The Tump administration is expected to roll back regulations that would have hampered new output in the years ahead, and have already given “explicit backing to two controversial pipeline projects – Keystone XL and Dakota Access.”
In fact, the U.S. oil and gas industry is expected to boost spending this year by about 35%, and rig counts continue to climb. Since the OPEC production cut deal end-November, our oil rig counts have increased by 125, and at 602, are at their highest levels since October 2015. The feeling is that OPEC and its non-OPEC partners will agree to another cut starting in July.
“Brent prices to average $50-$70 Through 2022–BofA Merrill Lynch.”
But, there are some warning signs for oil prices.
With non-OPEC compliance at just 50%, the oil market is still oversupplied by as much as 500,000 b/d in the first quarter, although this is a third of what we saw last year. There is also a ton of oil in storage (e.g., OECD inventory has been around 3.1 billion barrels), but “Expert Commentary: Inventory Draws Should Tighten Oil Markets Soon.”
And any rise to the $60 mark for crude could unleash some 1 million b/d of U.S. shale onto the market.
Brazil and Canada are two other nations that are expected to compensate for any decline in production that comes from OPEC.
Starting in September, Brazil’s government will be relaxing local purchasing rules for the oil industry to gain more foreign investment and lower costs. If or when oil prices rise, Brazil’s massive offshore reserves will become increasingly attractive.
Remember it wasn’t long again that Brazil was the rising star of the global oil business, only to be ensnared in a corruption scandal and by massive debt. In fact, state-owned Petrobras was reported last year as being the most heavily indebted company in all of the emerging markets.
I don’t think I agree, but TD Bank says that “if oil prices rise above US$60 a barrel then Alberta’s carbon tax likely won’t make or break investment decisions at all” in Canada’s oil sands, where some 180 billion barrels of heavier oil sit ready for development. Canada holds about 11% of the world’s proven oil reserves, and two surprising pipeline approvals running oil sands production to the West coast for export are expected to be good for “all Canadians.”
This will add over 1 million b/d to Canada’s oil export capacity.
A key advantage for the U.S. oil and gas industry is that the commodity price collapse forced companies to drastically improve their efficiency, extracting more with fewer rigs (you should know that one reason why National Oil Companies often stagnate is because a lack of competition deincentivizes them to get better). In the U.S. oil patch, these improvements mean more immediate returns and lower drilling costs.
Again, I can’t stress this enough, because oil has no significant substitute (e.g., last year Americans bought over 17 million vehicles that run on oil and only about 150,000 that run on electricity), the need to produce more oil is obvious: our demand will stay buoyantly very high, and exports to the world are essential to give poor nations a chance to develop. Exporting modern energy like oil (and gas) is a moral obligation. Oil, after all, is the world’s most vital fuel and the very basis of globalization.