INSIGHTS

On January 23, 2012

Oil Production Increase to Temper Crude Volatility?

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An interesting article on the resurgence of production of oil in the United States (Oil Fields Gushing in the U.S.) details the rebound in the amount of oil produced daily in the United States.  It relays the expectation by the U.S Energy Information Administration that output could pick up over half a million more barrels per day by 2020.  That would put daily output at over 6 million barrels per day, well short of the estimated daily usage.  However, it does show that the production gains of 1.3mm per day over the last four years were greater than the gains in Russia, China and Brazil combined (1.2mm total).


To look at this move in a longer time frame, consider the daily output over the last 110 years and the long-term trend line combined with a two standard deviation regression on the upside and downside.

U.S. Crude Oil Daily Output and Trendlines (thousands)



Source: U.S. Department of Energy


What this reveals is that with the new technology in pulling crude from shale, we might see the production begin to rise again to levels that may temper the volatile price of crude.  Some other factors to consider:

• OPEC (Organization of the Petroleum Exporting Countries) continues to have its impact mitigated by the fragmented order and lack of solidarity in its production constraints.


• Political pressure continues to rise within the countries that are large producers, which could cause large swings in prices as situations develop.


• If our prediction of global growth is slightly better than the tepid expectations, the increase in supply might be met with some slight increases in demand.

All in all, we expect to see energy output continue to increase in the United States and other countries.  The side effect may be a slower rebound in natural gas as an alternative replacement for oil so long as $100 per barrel continues to be the benchmark.  Long term, a bullish case for natural gas appears in place but it is difficult to imagine a spike from the dramatically low levels currently seen in natural gas.


 

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