Oil price could hit a different kind of peak oil in the years ahead

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The oil price took a hit from rumors that a deal was close with Iran on curtailing its nuclear program, the quid pro quo of which would be easing of the oil export restrictions the US has tried to enforce since former President Donald Trump walked away from the deal in 2018.

Brent crude oil price chart

SodelVladyslav/Adobe Stock

The oil price had been making a recovery since late March. Global demand picked up and OPEC+ has seemingly taken a cautious stance toward increasing output.

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Oil price and Iran talks

But the prospect of somewhere in excess of 700,000 barrels a day of additional Iranian supply hitting the market — not to mention the millions of barrels Iran has sitting in storage waiting to hit the market — signaled profit taking for investors, who headed for the door. In turn, that prompted a sharp price fall.

Almost as quickly, a clarification from the Russians that talks have had seen any progress saw an about turn. As a result, prices largely recovered.

But the sensitivity to the prospect of an Iranian resumption of sales shows just how fragile the market is. Furthermore, it shows how effectively OPEC+ has managed expectations to date.

Holding off on shale

Interestingly, money is not flowing back into shale oil despite a rising oil price. Small increases in some basins have been partially offset by even smaller reductions in others.

The net increase in U.S. oil output from seven major shale formations is only expected to climb by 26,000 barrels per day (bpd) in June to 7.73 million bpd, according to the Energy Information Administration. That would mark the first rise in three months. Furthermore, it’s a far cry from the 13 million bpd peak hit in February last year.

New drilling is marginal, leaving the total of drilled but uncompleted wells at their lowest since October 2018.

Price gains on the horizon?

Many still see higher prices, though. If not imminently, then down the line, as recovering demand meets the lack of capex in new production, resulting in a supply crunch.

Despite much talk about peak oil and oil companies writing off assets as potentially unrecoverable reserves, the fact remains a migration to a fossil-free future is going to take many years — decades, probably.

In the meantime, oil will remain a significant energy source while other options are developed. We have probably already reached, or are very close to, peak oil demand.

But what we could have to contend with is peak production.

BP sees oil demand remaining at 2018 levels of between 97 million and 98 million barrels per day till 2030. It sees that falling to 94 million barrels per day in 2040. It forecasts a drop to 89 million barrels per day three decades from now, according to its most likely forward planning scenario.

However, funders are wary of US shale and almost no offshore fields are in development. Furthermore, investors are actively lobbying oil companies to drastically cut fossil capex in favor of renewable capex.

With all that in mind, oil bulls have an argument that shortages will be a feature down the line.

In the past, we have talked about peak oil as a concept based on rising demand hitting resource limited supply.

But what we could see is stagnant or slowly declining demand hitting rapidly falling supply later this decade.

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