Aug 18, 2015

Crude oil supplies appear stable for the future

Despite widespread conflict in the Middle East, world supplies and prices of crude oil are stable.

It was not that long ago that even a rumor of conflict in the Middle East sent crude oil futures prices soaring. Despite current widespread conflict in the traditional oil-producing areas of the Middle East, crude oil supplies are increasing and prices are declining.

The major developments that have changed the world of energy production are horizontal drilling and hydraulic fracturing. For many years, shales were known to contain hydrocarbons but production was not economical. Now the Marcellus, Bakken and Barnett shales are world-class producers of crude oil or natural gas due to hydraulic fracturing.

Why are crude oil supplies forecast to be stable for the foreseeable future?

The U.S. is now a leading producer of energy in the world. The U.S. produces more liquid petroleum (11 million barrels/day) than Russia or Saudi Arabia. “The increase in domestic crude oil production of 3.6 million barrels a day in less than four years has reversed almost four decades of decline,” according to a recent article in The Wall Street Journal. Spurred by the use of hydraulic fracturing, or fracking, in shale rock deposits, U.S. oil production has jumped from 5 million barrels per day in 2004 to an average of 9.3 million in 2015, according to the Energy Information Administration.

Drilled wells that are shut-in (not producing) will be developed and add to supply. The drop in crude oil prices from $95 a barrel three years ago to less than $60 a barrel today has prompted U.S. shale oil producers to reduce drilling. These prices have also delayed the development of drilled wells that have yet to be fractured and produced. According to The Wall Street Journal, it is likely that as oil prices rise these wells will be completed, adding to the supply.

New well drilling and development technology. Lower oil prices are driving drillers and well developers to find new efficiencies. The surge in oil production has come from horizontally drilled wells targeting the well bore at the most productive geologic layers, from multiple well pads, with laterals up to 15,000 feet long. “Leading edge operators report that they can produce more profitably today at a price of $65 a barrel than they could at $95 a barrel three years ago,” according to The Wall Street Journal. Despite idle rigs and laid-off workers, U.S. onshore production has gone up since last fall, not down.

OPEC has no plans to cut production. Despite the invasion of ISIS into Iraq, its oil production was 3.8 million barrels per day in May. If this level is sustained, it will set a national record. Saudi Arabia produced 10.3 million barrels per day in May, which is up over 600,000 barrels per day since it decided to continue pumping at current levels to maintain market share. Saudi Arabia’s oil minister stated, “Even if prices were to fall to $20 a barrel, we don’t think we will reduce exports. We will increase oil production,” according to The Wall Street Journal. OPEC is also aware that Iran plans to add up to 1 million barrels per day to the global market in the event of a nuclear deal.

Despite low prices, supplies of crude oil in storage are at historic highs. February inventories show that total utilization of crude oil was 60 percent of storage capacity in the United States, compared with 48 percent at the same time last year. Capacity was about 67 percent full in Cushing, Oklahoma (the delivery point for West Texas Intermediate futures contracts), compared with 50 percent last year. From September 2013 to September 2014, crude oil storage capacity was increased by 19 million barrels at Cushing.

The Wall Street Journal recently reported that, “U.S. crude oil supplies are at their highest level in more than 80 years, according to data from the Energy Information Administration.” Crude oil is being stored in tanks, underground salt caverns and leased tankers. It is against the law to export U.S. crude, which leaves few alternatives other than to store any excess.

– Curtis Talley, Michigan State University