Conclusion
US shale oil has certainly changed the global oil market forever and has introduced a new swing producer with potentially an ongoing decline in costs due to technological advances. But it is also clear that the Saudi strategy has started to work — energy capital investment has plummeted over the past year and many producers face dire circumstances if prices do not recover.
In sum, US production in 2016, in our view, will be lower than current forecasts. Meanwhile, the decline in global oil prices has led to robust demand growth (that could well exceed current projections), along with a supply correction that will very likely result in a significant increase in the demand for OPEC oil by year-end.
However, this is a somewhat slow process and in the short term, concerns about oversupply and tightening (or even full) storage capacity are likely to maintain some pressure on prices. Further into 2016, however, the market should tighten and by the second half of 2016, it is quite possible that markets will be looking ahead at a potential supply deficit in 2017 and marking prices substantially higher.
Shale production will, of course, step in to meet some of that deficit, but the shale industry has been hit hard by the drop in prices. Some companies have entered bankruptcy and with low levels of maintenance spending the expected life of equipment is said to be falling for many producers. Banks, damaged by the 2015 shock, will also be significantly more reluctant to lend to the sector. Any future production gains would, thus, keep some downward headwind on prices, but are unlikely to be so large as to stop prices from staging some recovery.
