More interesting however, is another chart which caught Down and Forgie’s eye, showing a recent reversal in US shale oil produced by fracking companies.
US Shale Oil Production (m b/d) Source: US Energy Information Administration
If this decline continues as fracking companies cut back or go out of business, Saudi Arabia and the rest of OPEC could relatively soon consider it ‘job done’. They will then in all likelihood squeeze back supply to restore prices to a higher level.
“US shale oil has certainly changed the global oil market forever and has introduced a new swing producer with potentially an ongoing decline in costs due to technological advances,” said Down and Forgie in a research note. “But it is also clear that the Saudi strategy has started to work — energy capital investment has plummeted over the past year and many producers face dire circumstances if prices do not recover.”
“In sum, US production in 2016, in our view, will be lower than current forecasts,” they continued. Meanwhile, the decline in global oil prices has led to robust demand growth, that could well exceed current projections, along with a supply correction that will very likely result in a significant increase in the demand for OPEC oil by year-end.”
Alex Lee, senior portfolio manager, Japan equities at Canada Life Investments is another who sees these kind of developments as likely.
