The United States shale industry was one of the biggest success stories of the last decade. This story is ending as the growth rate is slowing. Some analysts see as much as a 12% pullback in shale production in 2020.
While this might bode well for the OPEC nations, there is another production center that is slated to really add to the global supply.
Drilling in the Gulf of Mexico, North Sea, and Brazil are slated to offset the decline in shale. Unlike the shale industry which is finding the debt markets cool to it, offshore drillers are finding the capital they need.
OPEC had to weather the shale boom by lowering its production levels in an effort to keep prices up. Now, with shale slowing, some are estimating the offshore non-U.S. drillers to add 840,000 BPD. In spite of the slowdown, shale is set to add another 800,000 barrels itself.
The supply side is not helping the equation. Simply put, there is a lot more oil being produced than being consumed. Electric vehicles are starting to put a dent in demand and that is expected to grow in the next two years as dozed of EVs are released by manufacturers.
None of this fosters a bullish attitude towards oil. There are some estimates out there of oil running up to $70 but it is unlikely. In addition to the factors just mentioned, the global economy appears to be in the midst of a slowdown. The United States economy is still growing albeit at a slower pace. A turn toward the negative would have catastrophic effects.
Oil prices still have a tremendous impact on society. There is a line of thinking that claims a great deal of the financial collapse of a decade ago was due to the fact that the global economy simply cannot withstand $140 oil. The shock that run up gave to the system caused it to collapse.
Fortunately, from the economic perspective, that is unlikely to happen again. With renewable energy in full swing, a spike like this could be offset, to some degree, by a more rapid shift to alternative energies.
2020 will be an interesting year for oil. If I had to guess, I think there is more downside than upside.
This is not financial advice.
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