This delayed rebalancing caused a large build up in global inventories; those excess inventories could act as a shock absorber of sorts once supply undershoots, but it remains unclear whether excess inventories alone or in combination with OPEC will be able to compensate for an eventual dual collapse of both shale and non-OPEC supply in the context of sustained demand growth.

Conclusion

This oil boom-bust cycle is not a repeat of the 1980s, however the arrival of shale oil to the global oil scene has created a new oil pricing reality. Nonetheless, it is highly unlikely that this new oil reality is anywhere close to $30 or $40 a barrel as the futures curve is indicating and many forecasters are forecasting.

Outside of Iran and Libya, OPEC is producing close to its maximum capacity, with little prospect of a sizable increase in supply over the next several years. In essence, OPEC alone is not in a position to compensate for shale and non-OPEC declines as well as meet future demand growth. Yet, for shale and non-OPEC to assist OPEC and grow a price in the $60 to $70 range is most likely required to incent the development of marginal oil reserves.

By 2017 as global demand and supply come into balance, and inventories start to draw oil prices may snap back substantially above the $60-$70 price range as the market transitions from a flood to a drought at some point next year, however once the next price spike period settles down as shale production catches up to demand once again, prices will likely settle in the $60 to $70 range long term, and remain there until the next noticeable change in demand/supply fundamentals or until the arrival of unforeseen geopolitical events.

(Republished with permission from oilprice.com)

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