All eyes were glued on Vienna last month as the Organization of Petroleum Exporting Countries gathered to assess oil market conditions and set production targets for its member countries to ensure adequate supplies, but also to support oil prices.
On June 22, amid reports of significant differences between Saudi Arabia and Iran, OPEC arrived at a production agreement, but did not disclose the target levels. The following day, non-OPEC members, such as Russia, which have been coordinating production with OPEC to avoid oversupply, signed onto the pact.
Saudi energy minister Khalid al-Falih offered that OPEC and its non-OPEC partners would provide “measurable support,” indicating that together the group would boost production by roughly 1 million barrels per day, or about 1 percent of total global supply.
But the statement of the group of OPEC and non-OPEC clarified that, after months of producing below their previously agreed quotas, this increased production was simply going to bring them back into compliance with those levels.
Crude oil prices had moved lower ahead of the meeting in Vienna, but popped higher after the announcement, as futures traders remain bullish on crude oil prices.
Earlier in the week, Richard Kaplan, president and CEO of the Federal Reserve bank of Dallas – one of twelve regional Federal Reserve banks that make up the Federal Reserve System, the U.S. central banking authority – issued an essay entitled, “A Perspective on Oil.”
Economists of the Dallas Fed have been closely studying oil and energy markets as crude oil production becomes an increasingly important part of the U.S. economy. And, as they work to model and forecast market cycles, understanding the impact of crude oil prices on both producers and consumers is an essential component of that analysis.
Kaplan and his economists “believe that global oil supply and demand are now in relative balance.”
They also believe that even with the mooted production increases by OPEC and non-OPEC producers, total demand growth will accommodate this increased production.
Hurdles Ahead
But, looking into the future, Kaplan notes several issues and challenges facing the global oil market:
- Little investment is flowing into long-lived projects, such as the deepwater, the Arctic and Canadian oil sands. This is a trend that has been discussed repeatedly by energy ministers and CEOs, who fear that failure to invest now for future production will result in supply shortfalls in coming decades with potentially dramatic and economically disruptive price increases.
- Global demand for crude oil continues to grow. Kaplan says global oil demand is likely to increase from an average of 98.4 million barrels per day in Q1 2018 to 101.5 million barrels per day in 2020, much of this growth coming from emerging economies.
- Notwithstanding the dramatic production growth from U.S. shale oil reserves – currently representing roughly 6 percent of global crude oil production – it too faces some challenges. These include rapid production declines, labor shortages, raw material availability, environmental concerns, infrastructure constraints – particularly pipeline constraints coming out of the Permian basin – and equity owners enforcing capital discipline on E&P companies.
- The markets are largely in balance and that makes them susceptible to geopolitical issues and supply disruptions – witness what has occurred in Venezuela and Libya in the past decade. Tensions in oil producing regions may produce similar events.
The Vital Role of Unconventionals
Over the next few years, the Dallas Fed economists see global oil markets balancing in a “fragile equilibrium,” with demand growth being met by U.S. unconventional resources and assuming no serious disruptions to existing global production.
A final point they make is that the U.S. economy has experienced a multi-decade decline in oil intensity, which is the amount of oil required to generate $1,000 of GDP. In 1970, they note, the United States used 1.1 barrels of oil to generate every $1,000 of GDP. In 2017, that number had dropped to 0.4 barrels of oil. As a result, they believe that modest price increases will not significantly dampen U.S. economic growth.
Stability in the oil markets hinges, according to Kaplan’s analysis, on the ability of U.S. shale producers to maintain and grow production.
There are challenges to accomplishing this, but understanding the science, technology and commercial pressures on unconventional resources is what we’ll be focused on this month with the return of URTeC, the Unconventional Resources Technology Conference, a collaboration of the Society of Petroleum Engineers, the Society of Exploration Geophysicists, and the AAPG together with nine endorsing organizations.
Heading to Houston for the first time in its history, URTeC will be at the George R. Brown center from July 23-25, and we’re looking forward to an event that will advance the science and empower you to succeed in unconventional resources.
But it’s not just unconventional resources. As the line between unconventional and conventional resources continues to blur, with science understanding and technology from resource plays now being used in more traditional plays, URTeC can help you succeed even if you aren’t focused on producing from shales.
What happens when unconventional becomes conventional? Come to URTeC and find out.