15 January 2015 - 22:48
  • News Code: 232996
Dark Future of Shale Oil

TEHRAN Jan 15(Shana)--Projections show that world oil demand will drop by another 1 million barrels per day during the first half of 2015 and this trend is expected to be followed by further price collapse which could be worrying for tight oil producers.

Oversupply by Non-OPEC producers was the main reason behind tumbling oil prices over the past six months. During the period, the price of Brent slid by more than 45 percent reaching 49 dollars form 108 dollars while West Texas Intermediate benchmark hit 48 dollars from 98 dollars during the second half of last year.

Falling oil prices by 45 percent during the second half of 2014 is taking place in a time when based on a routine pattern in the world oil markets expected oil prices to rise during the period.

Drastic fall in oil prices during the second half of last year was somehow unusual because oil supply-demand patterns show that usually oil demand falls between one to 1.2 million barrels per day over the first six months of each year which follows by weaker oil prices in world markets during the period.  

So, it is expected oil prices will go down further during the first half of 2015 due to seasonal changes and less demand for oil.

In the meantime oil demand is expected to rise by 1.66 million barrels per day over the second half of 2015 on average in comparison to daily demand for the first six months of the year. Without overhang and deceleration of world economic growth during the second half of 2015, it is expected that oil prices will rebound.

IEA reports show that world oil demand hiked by 1.2 million barrels per day in 2013 and 665 thousand barrels per day in 2014 on average while it is expected to rise by 910,000 barrels per day on average in 2015.

Meanwhile, shale oil production is expected to edge down during the second half of 2015 due to a decision made by OPEC to maintain oil production ceiling unchanged. Shale oil is now faced with falling investment and drilling while pressure on production of non-conventional oil is expected to gain momentum.

The chart below shows the breakeven cost of drilling in 30 shale oil fields in the United States indicates that shale oil production reacts to oil prices below 70 to 80 dollars per barrel, its growth comes to halt when prices are in 60 to 70 dollars range and will face drastic reduction in production when the prices hit between 50 to 60 dollars over a period between six months to one year. But, it is likely that despite falling production by 2 million barrels per day, shale oil sector may try to stand on its feet and survive.

 
diagram

Breakeven costs of drilling shale oil wells show that with oil prices below 48 dollars per barrel, 90 percent of shale oil production won’t survive and that is why we should wait for important developments in shale oil production in coming months.

Anyway, since oil prices below 90 dollars make current production of 5.5 million barrels of shale oil uneconomic, it could predict that oil prices will rebound in the future hitting almost 90 dollars per barrel, even if shale oil survives in the U.S in the short-term.

If this prediction comes true and OPEC continues its current policy of maintaining oil production unchanged at current level, halting shale oil production on the one hand and rebounding oil prices on the other will demonstrate that OPEC has taken an appropriate decision to regain control of the market.

Despite those who believe recent decision by OPEC will maintain current oil output unchanged and following tumbling oil prices is a sign of its weakness, it could be argued that OPEC by this strategy not only has been able to keep its customers but has been able to manage surplus in the market as well.

News Code 232996

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