And, we paid the price for that “higher forever” philosophy. We actually made it economical to
produce oil from source rocks, and we found better and better ways to produce that shale oil.
From November 2014 until now, October 31, 2017, the oil industry has undergone one of the most
severe downturns ……. ever. There is that word again – longest run of high oil prices ever, and
most severe downturn ever. What is going to happen next that will employ the use of the term
I submit, that what the oil consuming world is set up for next, is the most severe price spike ever.
In late 2008, oil prices fell from $140 to $38 essentially over night, as a result of the Global Financial
Collapse. But, OPEC cut production by 4.2 million barrels per day and the oil price recovery came fast and resulted
in the longest run of high prices ever.
One of the things that kept prices high was the “fear premium” built into the oil price. Instability in the
Middle East and the Arab Spring turning into the Al Qaeda/ISIS spring caused the fear. But along comes US shale
oil production, and the “fear premium” subsided.
The instability in the Middle East that caused the fear premium did not go away, but the increased
US shale production acted as an insurance policy – that no matter how bad things got – there was
a new large supply of oil that could keep a cap on prices. The fear of what would happen in a supply cut-off was gone.
So, the fear premium goes away at the same time that OPEC, namely Saudi Arabia, decides to cut the oil price
to drive domestic shale companies out of business
Things change on a grand scale, and the change seems to just happen while we are
not paying attention. Some say, or hope, that the shift in the energy industry
will be a move toward electric cars and a drop in demand for oil. That will happen – when oil becomes really scarce
and really expensive. Probably some twenty years from now.
What has been happening recently in the oil patch, is that demand has been relentlessly going up. Increased demand to the
tune of 1.5 million barrels per day has happened each year of this downturn, and now the economy is heading back to full
strength. Three years of downturn, 1.5 MMBPD equals a demand increase of over 500 million barrels per year for
three years. Over 1.5 billion barrels of new oil that is needed to meet demand.
The 1.5 billion barrels of demand increase is conservative. The current estimate for increasing demand is 1.7 MMBPD.
Either way, demand is being met by production, and increasingly by storage drawdown.
The fear premium will rear its ugly head as soon as the global inventory gets close to what is considered normal.
When the oil storage glut is reduced. And … that is happening now.
The lack of long term investment in new projects throughout the worldwide oil industry will result in a supply squeeze at the
same time as the fear premium and storage drawdown occurs. That is the recipe for a price spike.
Maybe the biggest price spike ever.
(Side note: As for natural gas - we are of the opinion that our winter weather will return to the cool side of normal, and that
means higher natural gas prices. In the near future, we will be talking about a shift in global temperatures to the cool side
and the effect that shift will have on commodity prices – especially natural gas. Say goodbye to El Niño and hello to colder winters).