Before I get into the rationale for my belief that oil prices must go up pretty soon to avoid a serious supply shortage next summer, let's get a few things right.
– Demand for oil is seasonal and October marks the low point of demand each year. Over the next eight months, global oil demand is expected to increase by 1.5 to 2.0 million barrels per day.
– It is impossible for US oil production to continue rising if the active drilling rate drops as a rock.
– The higher the percentage of American oil coming from horizontal shale wells, the more wells we need to complete each year just to keep production flat.
– Demand for oil continues to increase every year because nothing has the energy density of gasoline and diesel. This world runs on hydrocarbon-based liquid fuel and there is nothing on the horizon to replace it.
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In October “Oil Market Report” IEA said: “Global oil demand rose from previous low levels and increased 800,000 barrels per day (“ B / d ”) year-on-year ( "YOY") in July and 1,400,000 rpm YOY in August. Demand growth is expected to rise to 1,600,000 rpm in 2H19, taking advantage of a lower base in 2018 and oil prices are currently 30% lower YOY. Our forecasts for demand growth for 2019 and 2020 have both been reduced by 100,000 b / d, respectively to 1.0 million b / d and 1.2 mb / d respectively. For 2019, this reflects changes in 2018 data, and for 2020 reflects the lower GDP outlook. ”
The current oil price does not reflect how tight the physical market is.
The oil price you see in the business news is set daily by a bunch of day traders. Actually it is set by a bunch of computer models set up by day traders. There is a belief among the Wall Street Gang that there is plenty of oil in the world that can and will be produced even if oil prices stay in the 50s. This "paradigm" is untrue, but the assumption has been supported by high production forecasts released by the EIA and the IEA.
I expect the active rig number to continue to decline. I follow over 50 listed upstream oil and gas companies. They are “For Profit” units that will not drill and complete new wells just to be steady. Most of them "chase down" to live within operating cash flow, slowing US oil production growth. Oil in the low 50s is an unsustainable price.
There is a saying that "The cure for low oil prices is low oil prices" and this cycle will be no exception.  The US Energy Information Administration ("EIA") website states that they provide "Independent Statistics & Analysis" . I have been using EIA data for four decades. During that time, I noticed that they miss the turns in a cycle because the formulas they use to create supply and demand are heavily weighted against the trend. In other words, if the supply has increased 100,000 barrels per day each month over the past two years, they assumed it would continue to rise at the same rate in 2019 and 2020.
In the first seven months of 2019, The plumbing forecast for oil supply has been too high. We only have actual production through July. Here is actual production by month for the last eight months (thousand barrels per day):
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I believe the EIA will be forced to "face the reality" and lower its extremely high US oil production forecasts for 2019 and 2020. Once oil traders see severe downgrades of US supply forecasts. This should lead to a major step towards an oil price where US E & Ps will be incentivized to increase production. This is why I continue to say that "Right Price" for WTI is somewhere between $ 65 to $ 75 per barrel.
This totally ignores the high geopolitical risk of oil supplies coming from the Middle East.
US oil supply growth over the last decade has been largely driven by productivity gains per well; primarily the result of a huge improvement in drilling technology and well completion methods. Simply put, the industry has needed fewer wells to produce more oil – while also drilling more wells. Productivity gains have fallen like a rock, and the number of new wells is being completed.
“In our US oil supply model, this has proven to be a" beat and raise "for US oil production, where supply typically exceeds expectations and consensus estimates of supply growth must increase. This has been the case for the past eight years; However, from January in 2019, the plumbing invoices have started coming down our forecasts, in fact for seven months in a row. In our energy state reports from April and September, we discussed why well productivity development has begun to decline and even become negative. The market's apparent belief in perpetual improvement in well productivity supports a naive optimism that US oil supply may grow indefinitely – a "surprise" in this trend will therefore lower US oil supply forecasts. 21, 2019.
Another "False Paradigm" is that there is a large stock of drilled but unfinished wells ("DUC") that can be quickly put online to meet the growing demand. The DUC inventory is back to normal and about three of them are "Dead Ducs" that will never be completed.
(Click to enlarge)
As I have told my subscribers many times this year, it is by the current active drilling rig is unlikely to increase US oil production and if the active rig count falls, it is likely that US oil production will decline in 2020. EIA appears to ignore the fact that upstream companies are reducing investment costs. which I follow is expected to increase drilling and completion by 2020.  "EIA's onshore growth is set to increase in August, as it expects newly opened pipelines out of Perm to allow for additional takeaway capacity – and thus additional production. The total capacity of these two pipelines, just over 1.0 million bd, certai nly allows extra production to be brought online. However, we are skeptical that production capacity "waited in the wings" on these pipelines. In August, the plumbing projects 280,000 bd per growth in September, a further 190,000 in October and a further 100,000 in November, only from the lower 48 states (the "slate streams"). The EIA's total land growth of 700,000 bd per December into December is close to the fastest growth we've seen at any point in the last five years. Furthermore, this is by far the fastest growth in growth at any point since the decline in commodity prices. ” – Raymond James Energy Industry Brief October 21, 2019.
Schlumberger (SLB) and Haliburton (HAL) both recently reported sharp declines in their North American business units during the third quarter; another indication of fewer wells.
If oil prices rose to $ 100 / bbl tomorrow, I doubt the number of onshore drilling rigs would increase until the upstream companies are convinced that oil prices will remain high. If the WTI stays in the 50s and the active rig counts an average of 850 in 2020, Raymond James's production forecast for 2020 is 1.1 million Fd / d lower than the EIA's anticipated 2020 output rate of 13.4 million Fd. What happens if the active rig number continues to decline, which is more likely if WTI stays in the low 50s,