Can Low Oil Prices Withstand Lower Production Forecasts From The EIA?

The Energy Information Administration, in August, cut its US crude production outlook for this year and next, as lower prices reduce the number of drilling rigs.

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The agency reduced its forecast by 1.2% to 9.36 million barrels a day this year, according to the monthly Short-Term Energy Outlook released August 11. Production will still be up 650,000 barrels a day from 2014, but the EIA reduced its 2016 forecast to 8.96 million barrels a day from 9.32 million.

The September Short-Term Energy Outlook will come out later today but many are already predicting that the EIA will again predict that oil production began to decline in May and will continue falling into early 2016.

Rig Count Falling

The US oil-rig count fell by 13 to 662 last week, breaking six consecutive weeks of increases, according to Baker Hughes Inc.

The number of oil-drilling rigs, which is a proxy for activity in the oil industry, has fallen sharply since oil prices started falling last year. The rig count dropped for 29 straight weeks before climbing modestly in recent weeks only to fall again last week.

With declining production, will strong demand for gasoline bring oil prices back up next year? And, if so, will that immediately impact the prices of metals and other beleaguered commodities looking for support from energy costs? In short, it’s not likely.

Demand Still Hitting the BRICS

In short, no matter how much demand recovers this year in the US and Europe, emerging markets will not support rising prices anytime soon. Demand for oil has fallen with everything else in China. Oil fell more than 3% on Monday, hit by weaker Chinese equities and record North Sea crude production data that added to global oversupply concerns.

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North Sea crude oil output tracked by Reuters will rise to its highest in just over two years in October, according to loading schedules, adding to Atlantic Basin crude supplies. This is likely to pressure North Sea price differentials and weigh on Brent crude futures, which are trading below $50 a barrel having fallen towards $42, the lowest in more than 6 years, last month.

US production, while important to the price puzzle, will have a tough time outweighing overproduction and low demand in emerging markets. Especially if billions of barrels or Iranian crude join the global supply puzzle as is expected to result from the Iranian nuclear deal.