US oil production will continue to increase this year but at a slower pace, due to companies continued investment in projects underway, according to a recent analysis by Deloitte Market Point. For the past two years, US tight oil production has grown at an annual rate of 1 million barrels of oil per day (MMbopd).
“While the recent drop in crude prices has squeezed the CAPEX budgets of shale producers, some reportedly have been able to lower their operating costs to below $40/bbl through efficiency gains and better economics in the ‘sweet spots’ of the shale plays,” recent Deloitte paper said.
Many analysts expected declines of between 300 and 500,000 barrels of oil per day (bopd) off the 2014 pace.
Production is expected to continue outpacing demand in 2015 by approximately 400,000 bopd due to continued production growth in the first half of this year as producers seek to complete projects and unexpired hedging contracts allow them keep producing in spite of uneconomic market conditions. However, demand should start to grow faster than supply beginning in 2016.
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In 2014, new non-OPEC (Organization of the Petroleum Exporting Countries) large field projects, from Brazil’s offshore fields to the Gulf of Mexico to Russian and Canadian oil sands projects, collectively brought online 2.3 MMbopd in new supply. This year, Deloitte estimates that large field projects could bring on 1.835 MMbopd in new supply, including 1.2 MMbopd from non-OPEC producers and .635 MMbopd from OPEC members. Deloitte estimates production in 2016 to include between 2.676 and 3.434 MMbopd from non-OPEC producers and .759 MMbopd from OPEC members.
OPEC’s November 2014 to not cut production in face of increasing supply, leaving OPEC’s official crude production target at 30 MMbopd, was an “understandable” move by Saudi Arabia to protect its long-term market share. As a result, the price of WTI crude immediately declined 10 percent, according to Deloitte.
Members of OPEC were split into two groups. One group includes countries such as Iran, Venezuela and Nigeria, which are short on cash and whose governments could face instability if transfer payments cannot be made. The other group includes Saudi Arabia, Kuwait and the United Arab Emirates, which have cash reserves to survive the financial shortfall for many months, but who are worried over loss of long-term market share.
Strong oil prices have worked against these countries by facilitating the US shale boom, which has increased unconventional production in the United States and Canada. This production volume has changed the dynamics of imports and exports and reduced the West’s reliance on OPEC supply, Deloitte noted.