While the global oil market was shocked by the shale revolution, there are signs that shale will be in contraction.
Not only did the International Energy Agency (IEA) report that U.S. shale output will fall by 600,000 barrels a day this year and 200,000 barrels a day next year due to rapid declines in investments, we are now hearing from U.S. shale companies that would seem to suggest that those projections might be optimistic. With companies slashing investments and cutting dividends, it looks like the market is getting ready to roll over.
Investment in oil overall is also a concern. The IEA says that capital expenditure on global oil exploration and production is expected to fall 17% in 2016, following a 24% drop in 2015. This could lead to a price spike in the future, but it is the short term that the market is worried about. This is the lowest amount of investment in crude oil in 30 years.
Fatih Birol, executive director of the Paris-based IEA, said, “We are raising alarm bells about investments cuts. The worst-case scenario is we see a third year of spending cuts" in 2017.
"It’s easy for consumers to be lulled into complacency by ample stocks and low prices today," Birol said in a speech he delivered at the conference. "But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future.”
Today, the crude oil market will look to the Saudi oil minister, Ali al-Naimi, who is speaking at an energy conference. Will he offer any more insight into the Russia/Saudi Arabia production freeze deal? Will he give us an idea of how much wiggle room Iran will get when it comes to output?
We also get the American Petroleum Institute report tonight for energy inventories! The Bloomberg survey is showing expectations of crude oil supplies rising 3.0 million barrels. Gas supply will fall by 1.25 million barrels and distillate inventories down 1.15 million barrels. Refinery runs are expected to fall by 0.4%.