U.S. Oil Output Set To Overtake Saudi Arabia As Prices Rise Amid ‘Rare Threesome'
I’m so sick of talking about the up-the-down-escalator dynamic that characterizes the global oil market that I can’t stand it.
Assuming you made it to the second sentence of this post, allow me to reiterate why this whole charade is just that: a charade. As long as capital markets remain wide open thanks to the central bank-inspired hunt for yield, otherwise insolvent U.S. production will never go completely offline no matter how low crude prices fall. That production will just hibernate during downturns and then reemerge with a vengeance when prices rise.
So, when OPEC cuts to boost prices, what invariably happens is zombie production in the U.S. comes back and combined with non-zombie production (because not all of that production is uneconomic) the resulting supply glut caps prices which, barring some kind of geopolitical shock or other event that causes outages around the globe, eventually fall again, prompting extensions of the original cuts, and on and on and on as everyone trudges warily up an escalator which is moving tirelessly in the opposite direction.
Obviously it’s not that simple, but that’s the gist of it and until capital markets return to some semblance of normalcy in the U.S. (thus allowing investors to enforce some discipline) that’s the way it’s probably going to stay. When you throw in executive compensation being tied to the growth and/or addition of new oil and gas reserves (i.e. not to profitability) you’ve got a recipe for the expansion of U.S. production capacity.
Well guess what? According to the IEA’s most recentl report, U.S. crude production is about to surpass that of Saudi Arabia. This is the money quote:
Rapid US growth and gains in Canada and Brazil will drive up non-OPEC supply by 1.7 mb/d in 2018, versus last year’s 0.7 mb/d increase. US crude supply will push past 10 mb/d, overtaking Saudi Arabia and rivaling Russia.
The IEA goes on to describe a “rare threesome”:
Again, the inevitable result of that is rising U.S. production which in turn suggests it’s a self-defeating dynamic.
“A judgement as to whether the recent price strength is sustainable must take into account the rapid growth in global oil supply seen recently and which will continue through 2018,” the IEA goes on to write, adding that “short-cycle production from the US is reacting to rising prices.”
There you go. Up the down escalator.
And it’s hilarious because oil market watchers have been telling me for the better part of a year how my assessment of this has evolved to become too simplistic (I used to write more in depth posts on oil). While that might be true, what I would say is that month after month it’s the same story. This dynamic never changes.
Until it does, I’m going to keep pushing the same narrative because there’s a certain elegance in simplicity and there’s nothing that illustrates futility more simply than this:
Disclosure: none of what I write here is to be construed as advice to buy or sell any kind of asset. It is merely my personal and not my professional opinion. Any asset can go to zero.