An excellent new report from Citi’s commodities team suggests the US supply/demand balance for crude oil is undergoing fundamental change.
Importantly, they also argue that the concept of ‘peak oil is being buried’, and add:
“The belief that global oil production has peaked, or is on the cusp of doing so, has underpinned much of crude oil’s decade-long rally”.
US OIL MARKETS
As Citi note, the arrival of shale oil in the USA and the associated liquids from shale gas, is now “leading the US to be the fastest growing oil producer in the world“.
The Citi chart above provides dramatic evidence for the first assertion. It shows that the US has become a net exporter of refined oil products (gasoline, diesel, jet fuel etc) for the first time in 60 years. The scale of the turnaround is also important. The US imported 2.5mbd in 2005, but exported 360kpd in H2 2011.
Citi argue there is little reason to expect this trend to change. Not only is more oil being produced all the time, but US demand is also declining:
• On production, the key is developments in states like N Dakota, where companies are applying shale gas drilling techniques to shale oil deposits
• On demand, Citi share the blog’s view that higher prices reduce the ratio of oil demand growth to global GDP growth. Higher auto fuel standards, the attractiveness of shale gas, and increasing use of ethanol will also reduce oil demand
Citi thus expect the US “to achieve energy independence this decade”. This has been long-delayed since the goal was announced by then President Nixon in reaction to the 1973 oil crisis. But not only are the tools to achieve it now available, but also the political will.
PEAK OIL DOUBTS
The concept of ‘peak oil’ was originally invented in 1956 by a Shell geologist, M King Hubbert, and gained credibility from its accurate forecast that US oil production would peak between 1965-70. However, as the blog noted last year, Hubbert’s other forecasts were less successful. The USA produced 7.5mbd in 2011, rather than just the 1.5mbd he expected.
The major influence of the peak oil story has been in commodity markets.
As we noted in chapter 3 of ‘Boom, Gloom and the New Normal’, pension funds and others have been sold the idea that oil and other commodities represent a ‘store of value’ whose prices will always keep rising. Thus they have continued to buy, even though demand is falling and inventories are comfortable.
The major impact of the Citi argument is initially on US markets. They therefore expect the recent disconnect between WTI and global markets to continue.
Yet now the ‘peak oil’ theory is being challenged, the door is also opening for other countries to exploit the large deposits of shale gas and shale oil that exist outside the USA.