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Price Drivers

In a recent article in “Oil Voice”, author Andreas de Vries points out recent oil forecasts that have been wrong, explores the reasons why, offers an alternative approach, and then uses it to make his own projections.

After the oil price collapse of 2014, many observers expected domestic shale oil production to drop dramatically. This was largely because production costs for shale oil were between $70 and $90 per barrel.  It was assumed that this would continue to be the case in 2015, and falling production volumes would drive prices back up to around $60.  However, shale operators used a combination of improved analysis and completion techniques, refracking and pad drilling to lower costs by as much as 65%, and prices have yet to recover.

The problem with the 2015 price call, and many other recent prognostications, is the human tendency to assume that the trends we see today (high production costs in this particular case) will continue into the future. De Vries suggests that rather than extrapolate using current trends, we should look for new ones that will drive prices.  To this end he cites the work of futurist Ray Kurzweil.  In his book, Singularity is Near, Kurzeil offers his “law of accelerating Innovation” which maintains that innovation does not proceed linearly, but rather, at an accelerating rate.

De Vries interprets Kurweil’s work to mean we should expect three new trends to drive future oil prices. First he expects shale technology to go global, resulting in shale production in China, Russia, Argentina, Europe and the United Arab Emirates.

Secondly, de Vries expects shale technology will become a quaternary recovery technique. This will enable operators to revisit tight conventional reservoirs which had previously been passed by, and to re-stimulate production in mature fields which have already been exploited by tertiary recovery.

Finally, he sees the first two trends resulting in a decoupling of crude oil prices from political events. Additional reserves, and countries which produce them, will diversify the number of nations which control production and transportation. Currently, just 10 countries are responsible for two thirds of global output, and the top 10 consuming nations account for 60% consumption.  This concentration leads to transportation choke points, which in turn can hold oil markets hostage to political events, especially in the Middle East.  Geographic dispersion of production will alleviate this situation.  In fact, de Vries attributes the relatively muted reaction of prices to the Syrian revolution, the rise of ISIS, and tensions between Iran and the Saudis, to this diversification of risk.

The article leaves you with the impression that based on more supply and less risk we will see low and stable prices in the future. While the author makes an interesting strategic case, the forces he sees driving prices have yet to be realized.  Consequently, I think we can expect short and intermediate term price volatility.

To read the article in its entirety, please go to https://www.oilvoice.com/Opinion/608/The-Trends-That-Will-Be-Driving-the-Oil-Price-in-2016-and-Beyond .