Crude Oil: Tug of War with Oversupply and Non-OPEC Production
IEA, EIA, and OPEC estimates
Energy agencies such as the IEA (International Energy Agency) and the EIA (U.S. Energy Information Administration) expect crude oil production to fall over the long term in the non-OPEC (Organization of the Petroleum Exporting Countries) region. Even OPEC highlighted in its recent report that crude oil production from non-OPEC countries is expected to fall, led by the United States.
The top producers in the non-OPEC group are the United States, Russia, China, Canada, and Brazil. These countries produced 36 MMbpd (million barrels per day) of crude oil and liquid fuels according to EIA data in 2014.
Non-OPEC supply drop
The common problem for OPEC and non-OPEC producers is the fall in crude oil prices. Prices have fallen more than 60% since June 2014. The fall in crude oil prices has impacted revenues of major crude oil producers such as Chevron (CVX) and Occidental Petroleum (OXY). Oil tankers and refiners such as Tesoro (TSO) and Valero Energy (VLO) have fared well in the time of collateral damage for crude oil prices.
The fall in crude oil prices has impacted US and Canadian shale oil producers the most. Why? Because these companies have the highest production break-even costs. As a result, these companies incurred huge debt to scale up production in early 2010, and these debts are mounting.
Russia and Brazil are also incurring huge debt. The Russian government has devalued its currency and given tax benefits to oil producers to scale up production. Russia is continuing to produce oil at record levels of 10.7 MMbpd in September 2015. So Russia is in no mood to cut production.
Meanwhile, high-cost US crude oil producers might be slowing down their crude oil production compared to Russia. The drop in US production could slow down non-OPEC supplies and benefit crude oil prices in the short term.
But what will happen to the mounting debt for US energy companies? The EIA estimates that US production could fall from 9.2 MMbpd in 2015 to 8.9 MMbpd in 2016. US production was at 8.7 MMbpd in 2014.
Volatility in the crude oil market impacts ETFs such as the Vanguard Energy ETF (VDE) and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).
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