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Why Oil May Regain Upward Momentum

Why Oil May Regain Upward Momentum

Experts have predicted that positive…

David Messler

David Messler

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…

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This Could Be The Beginning Of A Tremendous Oil Rally

Oil traders

If you’re a fan of oil, and I expect you are seeing as how you’re reading articles on OilPrice, get ready for a positive forecast about oil prices moving higher. You’re going to like the direction this article takes. Oil prices are getting ready to rise…dramatically. We are going to move from a perception of severe surplus due to the global economic slowdown, to a reality of intermittent and localized shortages. This will be strongly evident by the 4th quarter of this year. Let me set the stage for this prediction.

In a recent OilPrice article I put forth a fairly bold theory about where the Super Majors might turn to replace lost shale production, given the oilfield, “tent-folding,” that’s underway now. To substantiate this theory I relied upon some logic based on my 40-years of experience in this business, and some general trends published by Rystad regarding the effects of underinvestment in a certain segment of the market. I now have some hard data which I will share in this article.

The market segment to which I refer is, of course, deepwater. Unloved and cast aside the last 6-8 years for hyper-investment in U.S. shale. The shale merry-go-round funded by cheap money and easy credit, fueled our production growth to new heights over the last decade.

EIA, Chart by author

When you add up the EOY production from shale, the Gulf of Mexico, and Alaska we were producing nearly 13 million bpd at the start of 2020.

My use of the term, merry-go-round is purposeful above, as it required constant infill drilling to maintain and grow production. As the oil price crashed after the Wuhan Covid-19 advent, and the OPEC+ failure of early March, it became increasingly obvious the shale “miracle” had come to an end. Here’s a quick activity snapshot for shale and then we’ll move on as the theme of this article is “what’s coming,” not “what’s happened.”

Primary Vision

Frac spreads comprise the pumping equipment that injects the water and sand into fractures in the earth created by hydraulic pressure. You can see from this data, they are in an absolute swoon from which they will never recover.

Big Oil and deepwater

A 25-year love affair between big oil companies and deepwater was derailed in the oil crash of 2014-15. Cost overruns had ballooned out of sight with some final project cost doubling or tripling by the time they were commissioned. No one really cared, because the embedded expectation was that oil would continue rising …until they didn’t. The shift by Saudi Arabia from production restraint to buoy prices to recapturing market share that was being lost to new producers, like the U.S., decimated the oil price. In a year and a half it fell from ~$110 a barrel, to a low of $26 a barrel in February of 2016.

In spite of a retooling of many deepwater projects that reduced their break even costs to the high $20’s in some cases, most of the project sanctions we’ve seen have been “advantaged oil.” This term refers to oil finds that made economic for development by the availability of existing production infrastructure. These typically are smaller, satellite fields with reserves of a couple of hundred million barrels.

Related: Supply Destruction Could Send Oil To $70
What we haven’t seen are the big deepwater exploration programs to find new reserves. The dilapidated state of the deepwater explorers, like Transocean, (NYSE: RIG), and Noble Corporation, NYSE:NE) are mute testimony to the lack of this activity.

This may change.

Where have the big guys been adding new production?

Oil companies have basically one mission-find and develop new reserves of oil and gas to maintain, and hopefully increase oil production. In a review of Chevron’s (NYSE:CVX) track record here over the last couple of years reveals a couple of striking data points.


One of these data points can be gleaned from the capture from CVX’s annual report. Their production growth year-over-year is pretty anemic. About 10% from 2017. That may sound reasonable to you, after all when you’re producing ~3 mm BOEPD as does CVX, the Law of Large Numbers kicks in fairly quickly.

So, if we limit ourselves to total production, we find that we aren’t asking the right question. A better question is, where is that growth coming from? The next graphic tells the tale.


In the graphic above you can see that in the Permian, production grew by roughly 100K bpd from 2019 to 2020.

It is then fair to say that CVX relied on the shale treadmill for most of its global production growth. I'll bet that other companies did so too. It is also fair to say that as drilling falls below the replacement rate for shale (a concept I've written on exhaustively in recent times.), and wells are shut-in to wait for better pricing, shale production is going to drop like a stone. 

Let’s continue on, one example does not a thesis make. Let’s look at the same data for BP.


BP performed worse than CVX on this metric as shown above, and actually experienced a global decline in liquids production over the last three years. A look at the next graphic reveals that like CVX, BP’s growth came primarily from the Lower 48 onshore, which I will assure you is shale production.


We were to look at some of the other big oil companies, like ExxonMobil, (NYSE:XOM), ConocoPhillips, (NYSE:COP) (which we ultimately will), I expect we would see more of the same.

This brings us to the central theme of this article.

The need for deepwater exploration

One thing you need to understand is U.S. shale has begun a rapid decline from which, unlike in 2017, it will never recover. The market has changed. The service industry which did the “heavy lifting,” of actually performing the fracks, is decimated. The few that will survive, Halliburton, (NYSE:HAL), Schlumberger, (NYSE:SLB), Baker Hughes, (NYSE:BKR) and a few others are exiting the fracking business largely in North America or dramatically reducing their footprint through billions of dollars of charge offs and write-downs of the business of the last year. The capacity to resume the upward trend in shale simply no longer exists. Related: Is It The Right Time To Buy Into The Oil Price Rally?

With U.S. shale irreversibly imploding, oil companies will have to dust off their deepwater portfolios to begin looking for the deepwater reservoirs that will be needed to replace fields that now have been online for over a decade.

One of the companies we’ve discussed in this article, CVX has a large inventory of drillable prospects in the Gulf of Mexico, Brazil, and other areas of the globe. In an article published in S&P Global-Platts last year, Jay Johnson, CVX’s VP for Upstream commented about their view toward deepwater-

“Now ready to take on a selected few projects requiring higher capital expenditures and potentially years to bring on stream. In the past few years, industry has learned how to lower the costs of those projects through phased designs, improved construction and better supply chain logistics.”


S&P Global-Platts

If you read between the lines in the quote above, Mr. Johnson saying they are going to have to fund multi-billion dollar capex programs going forward to find new reserves in deepwater.

The reality there is simply no other compartment to which they can turn to find reserves to replace those fields that will be starting rapid declines or tertiary recovery efforts.

Other operators like BP, and Shell will be in the same boat.

Your takeaway

This is good news for the oil price. I told you at the beginning you would be happy with the conclusions of this article. Perception that the global economic recovery has begun, and excess shale production will be reduced is actually changing the market’s perception even now. Crude prices have rallied dramatically in the last few days.


The rate of new drilling is now far below the decline rate for shale, ~ about 30K bpd, or 900K a month. When you combine that with crude inventories, which are now about 25-million bbls above the typical peak range, and will be worked down rapidly over a few months as shale production is shut-in and summer driving picks up.

Accordingly we are estimating a year-end price of $45-50 dollars for WTI and a year-end U.S. shale production exit of 4-5 million bpd. When combined with the curtailments coming from Saudi Arabia, Russia and other countries we estimate that as much as 20 million Bpd will have been removed from the world market.

These curtailments put us in rough balance with global demand at 75-80 mm BOPD, and any short-fall from there will quickly put us into deficit.

Better days are ahead for the oil bulls!

By David Messler for Oilprice.com 

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Leave a comment
  • Rene Sonderegger on May 06 2020 said:
    This is another try to bull up the oil for loosing money. There is not much oil demand. Until we haven't found a vaccine, the demand will decline because of all the home office workers which no more using their car's to go work. Travelling is band, 90% of all flights are cancelled. Swiss airlines parked most of their plains in Arabia, because they know that they aren't used for a longer period....
  • zorro zorro on May 06 2020 said:
    And why, if the market got that tight, wouldn't OPEC+ simply turn on the taps a little to soak up whatever demand returns? It seems to me you're assuming market balance based on the curtailments continuing, but the moment WTI popped it's head up that high, and assuming US storage can take it, wouldn't those shale wells currently being shut in be reversed?
  • Maxander on May 06 2020 said:
    Post coronavirus, there will be big pressure on Congress to immediately start proposed ban on oil drilling activities in Pacific & arctic ocean areas, wild life areas to protect wild life, offshore gulf areas for cleaner water.
    Nearly 30% of America's crude oil reserves are on the list of permanent ban, law passed by White House last year, yet to start its meaningful impact on America's domestic oil production.
    So, US oil production has already topped out at 13 mn bpd for lifetime. I don't see it going even close to that of beyond that in future.
  • Phil Mirzoev on May 06 2020 said:
    I totally agree. I expressed the same views more than once. It is actually amazing how little the "objective media" is talking about the destruction of supply in oil. Here I am just laying out again what I had already said regarding 70 USD/bbl in 2025 forecast published in a different article:

    "Supply Destruction Could Send Oil To $70". That is a very conservative forecast if we are talking about a 5-year horizon. It can end up not at 70, but closer to 170 USD per barrel by 2025.
    Permanent - that's the key word PERMANENT - destruction of oil capacity is taking place not only in the US shale sector (though the latter bears the brunt of it, to be sure), but in quite a number of countries, including Canada, Venezuela, Brazil, probably Nigeria etc.
    In my view, a total annihilation of at least 5 M bbl/day from the world capacity is a pretty conservative guesstimate, and the kind of chronic deficit - around 5% at least - that the world is going to wake up to after all the dust settles and the smoke clears, and the accumulated excess has been soaked up by the market after coming back to normal demand, is gonna make the world pay dearly for the past decade of artificially low oil prices (courtesy of shale, which was governed not by the market but by the borrowing and indirect subsidies).
    The problem will be compounded by the galling circumstance that this erasing of 5 M/day is going to be "super-permanent" in the sense that the substitution for this capacity is not going to be coming for years and years because after the shale bubble burst few crazy investors would even think about growth investment in oil - there was enough collective trauma caused by shale which was born a zombie, has stayed a zombie and is dying a zombie.
    It will take months to destroy the supply (and demand), and it may take a year for the demand to restore, and it can easily take a decade to restore the supply

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