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New EIA data once again points to a deeper contraction than previously expected.
The revelation was initially revealed in late August, when the EIA reported that the United States produced much less oil than expected in the first half of 2015. On the whole, the country produced 40,000 to 100,000 fewer barrels than previously reported between January and May. The August report also showed that U.S. oil production peaked in April at 9.6 million barrels per day (mb/d), before falling to just 9.3 mb/d in June.
The declines suggested that the contraction in the U.S. shale industry was deeper than the world had initially thought. And one can only assume that the decline either kept up at a similar rate, or even accelerated in the intervening months since June.
The latest data from EIA confirms this trend. In its Short-Term Energy Outlook released on September 9, the EIA estimates that the U.S. oil industry lost another 140,000 barrels per day between July and August. That is a faster rate than the 100,000 barrels lost in June. Moreover, the agency predicts that output will continue to decline for another year until August 2016, before picking up again.
The U.S. is expected to produce 9.2 mb/d on average in 2015, which will drop to just 8.8 mb/c in 2016. Both of those figures are 0.1 mb/d lower than last month's projection.
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This contraction is one of the biggest determining factors to oil prices finding their footing. At its expected low point one year from now in August 2016, U.S. oil production will bottom out around 8.6 mb/d, about 1 mb/d below the peak reached this past April. That could go a long way to cutting into excess global oil supplies.
Unfortunately for many oil executives, OPEC could offset the declines from the American oil patch. The EIA predicts OPEC production will rise from 30.97 mb/d in the second quarter of 2015 to 31.19 mb/d in the third quarter. A year after that, EIA believes, OPEC could still be producing over 31 mb/d per day. Following the nuclear agreement between Iran and the West, Iran could bring back some of its oil production. The EIA estimates that Iran will add 0.3 mb/d by next year. In other words, OPEC won't cut back on production even though oil prices are below $50 per barrel.
Taken together, global supplies could actually increase between now and the end of next year, despite a significant pullback in U.S. oil production. Put in this context, it appears that OPEC's strategy of pursuing market share by forcing higher cost producers to cutback could bear some fruit. Even if it takes longer and the adjustment is not as sharp as expected, Saudi Arabia will maintain its grip on the market, pushing U.S. shale to contract.
A separate EIA report confirms this trend. Saudi Arabia kept oil exports elevated throughout the oil bust, holding onto market share in several key Asian countries that account for much of the recent growth in oil demand. For example, despite China's oil demand rising substantially in the first six months of 2015 compared to the same period a year earlier, Saudi Arabia held onto 16 percent of the Chinese market.
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With Saudi Arabia keeping oil production elevated, and potential gains from other OPEC members like Iraq and Iran, oil prices may not rebound in the way that everyone expected. The EIA revised its projection for oil prices downwards once again, taking into account the rout suffered in the oil markets in August. Next year, WTI will average $53.57 per barrel and Brent will sell for $58.57 per barrel, which is down 1.4 percent from last month's forecast. In 2014, WTI sold for $93.17 per barrel and Brent went for $98.89.
The climb back to those 2014 levels will take a long time.