OPEC is Winning the War Against US Shale – Oil Prices Positioned for Solid Recovery

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Steve Stengell
President CEO
Encore Energy, Inc.

Bowling Green, Kentucky (July 23, 2015): Global oil production is declining and long-term supply may not meet demand in the not so distant future. This scenario is exactly what OPEC had in mind at their previous meeting in early June of this year. Drilling permits are down 40%.  The U.S. rig count is down by more than 50% while the Bakken and Eagle Ford shale plays are declining by as much as 15%.   The American Petroleum Institute (API) reported that crude inventories fell by 7.3 million barrels in the week ending July 3rd while OPEC reserves are declining from previous years.  The estimated daily oil production surplus is only 1.95% of total global oil consumption in 2015 and further falling to 0.67% in 2016. The global economy is projected to grow by 3.3% in 2016.

“It appears that analyst, commodity traders and other experts outside of the oil and gas industry are just now realizing that many of the US non-conventional oil plays are much more expensive and decline at a much higher rate as compared to conventional oil properties”, said Steve Stengell, President CEO of Encore Energy, Inc. “Non-conventional oil projects typically decline by as much as 50 – 60% or more in the first-year, making it very difficult to compete with OPEC’s conventional production model. By electing not to restrict production for the short-term, OPEC has made a significant investment toward regaining their position in the global oil market.

Oil finding and development costs are increasing due to the fact that technology and well depth are becoming increasingly important to new projects.   Even more concerning, many E & P companies are defaulting on their loans, which may make it even more expensive to raise capital for future projects.   This further increases the cost to drill. Eventually, the increased cost to drill and develop production will manifest itself in the price for crude.

Although the EIA reports that the US is increasing oil production, no wells are being drilled and there is almost no mention as to the actual production decline from shale production.  Where is this production coming from? Many other independent sources claim that the EIA and the media have been intentionally understating demand and overstating “estimated” production. Many sources claim that the EIA government reports are overstated by as much as 40%.

The global oil market is and has always been inefficient due to the fact that it is primarily driven by propaganda, speculation and extremely suspect short-term supply estimates.  A truly efficient market would also incorporate more specific production reserve “supply-side” information, including but not limited to, well depth, formation pressure, reservoir characteristics, reserve studies, etc. as it pertains to international and domestic producing fields or regions.

Bottom line, it is very likely that we could move surprisingly quickly from a production surplus directly to an irreversible shortage, since no new production is coming online. Many industry experts are already betting on oil to be at $75 by year-end.

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