Near Future Sees Decline in U.S. Shale, a Fortified OPEC, and Natural Gas Dominating Energy Use

Tuesday September 11, 2018

Several events this week provided tantalizing glimpses of how the crude market may play out in the near future, with the Organization of the Petroleum Exporting Countries (OPEC) maneuvering to achieve long-term cooperation in its activities, U.S. production growth apparently less than expected, and the prospect of natural gas overtaking oil as North America's largest energy source.

Alexander Novak, energy minister for Russia, stated on Tuesday that the OPEC+ oil group may sign a new long-term cooperation deal at the beginning of December; although he didn't provide details, the deal is said to be designed to monitor the market and take output measures when required, supposedly with complete unity of agreement - unlike the squabbling that has traditionally hobbled the cartel's initiatives.

OPEC of late has struggled to remain on the media's center stage thanks to all the attention given to surging U.S. shale, especially under the Donald Trump presidency, but on Tuesday the Energy Information Administration reported that U.S. crude production is expected to rise by 840,000 barrels per day (bpd) to 11.5 million bpd next year, lower than a previous expectation for it to rise 1.02 million bpd to 11.7 million.

Although the decline is minuscule, it could fuel the argument of some analysts that American shale has peaked and an extended decline is inevitable; however, it should be noted that the Agency based its forecast on the fact that drilling activity in the Permian Basin, the largest U.S. oil patch, has begun showing signs of a slowdown due to limited pipeline takeaway capacity - and smart money may argue that steps are already underway to improve infrastructure.

Meanwhile, if DNV GL is accurate, the analytical focus in 2019 may gradually shift away from oil and toward natural gas: the risk management firm stated that energy demand in the U.S. and Canada would continue to decline in the coming months, as improving efficiency in the transport sector dramatically reduce North America's reliance on oil.

Remi Eriksen, president and CEO of DNV GL, said, "Energy efficiency is going to outpace the growth in gross domestic product, that's the main reason why energy demand is peaking; [and] there will be a massive change in technology in the transport sector, not only on the roads but also at sea."

In a separate statement, the company forecast that "natural gas is set to overtake oil as the region's largest single energy source [this year] and remain the dominant source until 2050."

Of course, forecasts in the crude market have a tendency to quickly go south, and presumably no organization would like to see DNV GL proven wrong than OPEC, which earlier this year predicted that world oil consumption will reach 100 million barrels per day later this year, much sooner than previously forecast.