This is a market, which is reluctant to react to bullish news but happy to jump on the bandwagon when the status quo is re-established. There was no price support forthcoming last week when Libya was forced to shut production down and severely restrict exports, yet the agreement to appoint a central bank governor was greeted with a massive sell-off, which sent the price of Brent to its lowest level this year and RBOB close to the trough of 2021.
Of course, the reported resolution of the friction between the two legislative bodies of the country to appoint a central bank governor merely magnified already existing concerns of oversupply. Those leading the current move lower are making a judgment call that the OPEC+ producer group will go ahead with its planned unwinding of its 2.2 mbpd production cut from October. What they do not take into consideration is that the recent bloodshed will make it increasingly difficult for producers to stick to the original plan and the compensation plan of the group’s laggards would counter the production increase almost to the barrel. There is a growing possibility that the proposal will be put on hold, although the silence from the producer alliance is worrying and deafening. Should they decide to go ahead and add around an extra 180,00 bpd to the market, the repercussions will be dire and further weakness will be in order.

Anxiety about growing supply was complemented by fears about the health of the global economy. Whilst Chinese troubles have been in focus for a few months now (the Caixin services PMI retreated in August), the latest reading on the state of the US manufacturing sector increased the prospect of economic slowdown. The closely watched ISM index came in under expectations sending equities tumbling. The fall was aided by the 10% drop in Nvidia after the US DoJ sent the chipmaker a subpoena as it assesses the company’s dominant position in its field of activity. Bad news, indeed, turned into bad news but the silver lining, if there is any, is that the possibility of a rate cut, even as high as 0.5% in September, has increased provided that a series of US job data will not disappoint later this week.

Peak is not in Sight Yet

Diverging views of global oil demand are well-publicized and the outlook is equivocal. BP, for example, expects it to reach its summit as early as next year. The IEA believes it will plateau in 2029 at 105.6 mbpd and will start contracting the following year. OPEC would argue that that the world will be reliant on oil throughout 2045 and at its peak it will consume as much as 116 mbpd.

Whilst estimates on future output can also vary there is a tacit agreement that supply would be abundant, if required. This, however, has not always been the case. Peak oil is a hypothetical scenario of production reaching its zenith and starting to decline. In the 1950s, geophysicist, Marion King Hubbert believed that oil production was a bell-shaped curve and predicted US output reaching its pinnacle in the 1970s. It was widely accepted that as existing reserves are depleted faster than new ones explored and brought online the cost of extracting new reserves would inflate making production unrewarding.

Naturally, peak supply and demand go hand in hand, they have tangible impacts on one another. If demand suffers for whatever reason, supply will adjust as financing exploration projects will be uneconomical. Conversely, scarce supply will push the price of oil higher ultimately adversely affecting consumption and so the traditional cycle goes.

In the past warning signs of peak supply had been flashing on several occasions but each of them proved untimely. Technological advances have ensured adequate supply. The far-reaching example, which has had a profound impact on the oil global oil balance, therefore on oil prices and the transition from fossil fuel to renewable energy, is the emergence of the US shale industry, thanks to the invention of hydraulic fracturing; commonly known as fracking. The technology turned the United States into the world's biggest oil producer. Daily output has nearly tripled since 2008 as it has grown from 5 mbpd to 13.4 mbpd.

Innovation and technological advances have opened the latest frontier in exploring and producing oil. With the ultra-high-pressure (UHP) drilling technique formerly inaccessible oil reserves can be unlocked by enhancing efficiency and drilling time. The new technology is particularly efficient when tapping high-pressure, high-temperature (HPHT) wells deepwater. This technology, as Energy Intelligence (EI) points out, has been in development for more than 10 years and uses pressure ratings exceeding 20,000 pounds per square inch (psi) (20k). The latest chapter in oil production reached its crucial milestone in the middle of last month, when oil giant, Chevron pumped oil from the first well of its $5.7 billion Anchor project with the second well drilled and close to being turned on.

It is not just Chevron that has invested heavily in the new technology. EI published the list of sanctioned projects in the Gulf of Mexico. Chevron's Anchor project has recoverable resources of 440 million boe with a capacity of 75,000 bpd and 28 MMcf/d. Beacon's Shenandoah project is expected to produce 120,000 b/d of oil with the estimated start-up year in 2025 and its Monument development a year later. Shell and BP are expected to start production of their Sparta and Kaskida projects in 2028 and 2029 respectively. Their production capacities are seen at 90,000 boe/d and 80,000 b/d of oil. The recoverable resources are seen at 244 million boe and 275 million boe.
Wood Mackenzie believes that more than 2 billion boe could be tapped in the USGC using the 20k technology and operators hope that individual wells will be able to recover 30 million boe. To broaden the horizon, according to consultancy Rystad Energy, more than 5 billion bbls of oil and gas resources could be unlocked globally with the UHP technology, in producing nations such as Brazil, Angola and Nigeria.

Whether the new method of recovering oil will ultimately prove a long-term success depends on several factors, first of all on the oil price. Wood Mackenzie believes the already sanctioned 20k developments have a break-even price of $30-$45/bbl. Technological breakthrough once again implies that hastening transition will implausibly come from the supply side and the major players in 20k drilling are convinced that demand for oil will remain healthy in the foreseeable future. As my esteemed colleague noted, it will also provide much-needed energy security for the US and its allies in today’s dog-eat-dog world and will play, akin to shale, a salient role on the geopolitical and geoeconomic stages.

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