We believe Exxon presented a very bullish argument for oil prices beyond 2020 and that it has been overlooked because most readers only flip thru a slide deck and don’t listen to or read transcripts of management’s spoken words. Exxon’s spoken words highlighted one of the forgotten (and perhaps most important) oil supply/demand concerns for post 2020 – the mid term challenge to replace increasing rate of overall global oil declines. And what is eye opening is Exxon’s estimated overall global oil decline rate, which is way higher than any we can ever remember seeing. Its impossible to tell from the small oil supply/demand graph in the slide deck, but Exxon’s spoken words says long term oil demand is 0.7% per year and then “When you factor in depletion rates, the need for new oil grows at close to 8% per year and new gas at close to 6% per year.” Exxon may not specifically say what the global decline rate is, but their math is that the world needs new oil supply to grow annually at close to 8% to meet the 0.7% annual increase in oil demand and offset declines ie. an overall global decline rate of approx. 7%. This is an overall global oil decline rate for OPEC and non-OPEC. This compares to BP’s estimate of overall global oil decline rate of 4.5% and we expect most are probably assuming something around 5%, certainly not above 6%. No one should be surprised by the increased decline rate given that high decline US shale and tight oil have increased by ~2.5 mmb/d in the last ~2 years. But an implied ~7% overall global oil decline rate is way higher than expectations. There is a big difference between needing to offset oil declines of ~7 mmb/d vs declines of ~4.5 mmb/d ie. an additional 2.5 mmb/d of new oil supply every year. Even if the implied difference was to 6%, it would still be an additional 1.5 mmb/d of new oil supply and that would also be very bullish for post 2020 oil. We recognize that the 2019/2020 oil supply demand story is the need for OPEC+ to keep cuts thru 2020, but Exxon’s math implying ~7% overall global oil decline rate sets up a very bullish view for oil post 2020. We believe the reality to replace oil declines post 2020 is overlooked.
The 2019/2020 oil story – oil inventories still above the 5 yr avg and OPEC+ need to work together in 2020. There is increasing geopolitical risk to oil in a range of regions (Iran/Saudi Arabia, Libya, Venezuela, etc.) yet the prevailing tone to oil in the past month is negative with the concerns on trade wars/lower economic growth leading to weakness in oil demand. This was reinforced in the past week with the view that there is the need for OPEC+ to continue to work together in H2/19 and in 2020. Our SAF June 16, 2019 Energy Tidbits memo [LINK] reviewed the IEA’s new monthly Oil Market Report [LINK], which included (i) “OECD oil stocks remain at comfortable levels 16 mb above the five-year average”, (ii) the EIA lowered its 2019 oil demand growth rate by 0.1 mmb/d to +1.2 mmb/d, and (iii) a negative first look at 2020 oil supply/demand. The EIA’s first 2020 forecast puts more pressure on OPEC+ to continue with cuts through 2020. IEA says oil demand growth rate will grow from +1.2 mmb/d in 2019 to +1.4 mmb/d in 2020. This is a positive, however, it is more than offset as the IEA forecasts another year of big non-OPEC oil supply growth of +2.3 mmb/d in 2020. In theory a lesser call on OPEC of 0.9 mmb/d. The IEA writes “A clear message from our first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2 mb/d of spare capacity”.
Exxon sees modest annual growth in oil demand, but peak oil demand sometime after 2040. Exxon presented at a US sellside energy conference on Tues. We expect a big reason why Exxon’s oil outlook was ignored was that the presentation was almost all about providing a great detailed look at the Guyana oil play. Plus its headline annual growth rate for oil demand of 0.7% per year wouldn’t have made anyone bullish, if anything maybe even more so so on oi. Exxon only provided some brief comments on their oil supply and demand outlook. Exxon said “In this scenario, oil demand is expected to grow 0.7% per year, driven by commercial transportation and chemical”. This compares to 2018 oi demand growth of 1.45% and even this year’s lower oil demand growth rates of 1.15%. However, we recognize it is tough to get data from a small graph, but a positive tn the graph is that it seems to indicate that peak oil demand doesn’t happen before 2040.
However, Exxon says new oil supply of 8% per year is needed to meet demand growth and offset decline rates. On one hand, we continue to be surprised that Exxon’s view on new oil supply has received no attention. On the other, it makes sense because the vast majority of readers only flip thru a slide deck so will miss the spoken word that gives numbers and context to a slide. That was clearly the case with the Exxon presentation. If Exxon is anywhere near right, this is a hugely bullish view for mid/long term oil ie post 2020 oil. Exxon highlighted one of the forgotten oil supply/demand concerns is the mid term challenge to replace global oil declines. And what is eye opening is Exxon’s estimated decline rate, which is way higher than any we can ever remember seeing. Exxon says long term oil demand is 0.7% per year and then says “When you factor in depletion rates, the need for new oil grows at close to 8% per year and new gas at close to 6% per year.” Exxon didn’t specifically say that the overall global decline rate was ~7%, but the math looks straightforward. The world needs new oil supply to growth at close to 8% per year to meet 0.7% annual demand growth and to offset declines in global (OPEC and non-OPEC) oil production ie. the overall global oil decline rate is approx. 7%. This is an overall OPEC and non-OPEC global decline rate.
Oil Supply/Demand (moebd)
Source: Exxon US Sellside Conference Presentation June 18, 2019
Implies a huge overall global decline rate of ~7% – way higher than other estimates. It may well be the case that forecasters haven’t updated their global oil decline models to reflect the impact of the US adding ~2.5 mmb/d of high decline shale and tight oil in the past two years. But we aren’t aware of anyone who is using an overall global oil decline rate as high as 7%. We have seen estimates for 7% for decline rates for non-OPEC oil, but not for the decline rates overall for global oil. Rather, we expect that most have been assuming overall global oil decline rates of 4% to 5%. Later in the blog, we note our peak oil demand comment from Nov 6, 2017 (prior to the big ramp up in US shale and tight oil) that used Core Laboratories spring 2017 estimate for overall global oil decline of ~3.3%.
Exxon’s global leadership position, especially in shale, is why we should pay attention to this view of significantly higher global oil decline rates. Everyone knows Exxon is the largest public international oil company and is in all major oil regions and all types of plays from conventional, oil sands, middle east, deepwater oil and shale oil, We believe that Exxon is viewed as the global leader in the Permian, and this shale oil leadership is critical to understand as we believe that the growth of US shale is the key reason for the increasing overall global oil decline rates. Exxon’s shale oil leadership is why we should be paying attention to this estimate. The game changer to global oil decline rates has been the increasing oil production from high decline US shale and tight oil. The EIA estimates [LINK] that US shale and tight oil plays are up over 6 mmb/d this decade and ~2.5 mmb/d n the past two years alone.
US Tight Oil Production – Selected Plays (Million barrels of oil per day)
BPs recent forecast for overall global oil decline rate is 4.5% per year. BP’s Energy Outlook 2019 Edition (Feb 14, 2019) [LINK] included their outlook for oil supply and demand and specifically on overall global oil decline rates. BP wrote “Second, significant levels of investment are required for there to be sufficient supplies of oil to meet demand in 2040. If future investment was limited to developing existing fields and there was no investment in new production areas, global production would decline at an average rate of around 4.5% p.a. (based on IEA’s estimates), implying global oil supply would be only around 35 Mb/d in 2040.” Below is the graph from their Energy Outlook 2019 Edition report.
Demand and Supply of Oil (Mbd)
Source: BP Energy Outlook 2019 Edition
If Exxon is anywhere close, this is a hugely bullish signal for mid/long term oil ie. post 2020 oil. We recognize that this significantly higher than expected overall global oil decline rate will take a year or two to work thru the current supply/demand fundamentals given where markets are today. However, over the mid term, the need to add ~7 mmb/d of new oil supply is a huge challenge for the world. The difference between an Exxon type view of ~7% declines vs BP’s 4.5% declines is approx. 2.5 mmb/d of an additional new oil supply every year is needed to balance the markets. In reality, even if Exxon’s implied overall global decline rate was ~6%, it would still be very bullish for mid/long term oil as this means an additional ~1.5 mmb/d of new global oil supply per year.
Its even more bullish for post 2020 oil than we thought in our Nov 6, 2017 peak oil demand blog. We have always been in the camp that believes peak oil demand is coming, but we have also been of the view that the post 2020 challenge to replace oil declines would be getting tougher. We believe Exxon’s view of higher global oil decline rates is consistent with the ~2.5 mmb/d increase in US shale and tight oil in the past two years. And is way more bullish than we wrote in our Nov 6, 2017 blog “Peak Oil Demand Is Coming, But >4 Mmb/d Of New Oil Supply Will Be Needed Every Year To Replace Declines To Get There” [LINK], and “We buy into the narrative of peak oil demand, believe it is inevitable, its visible and will happen before 2030. Peak oil demand will be from the cumulative impact of a number of factors including EVs, battery/storage, LNG for power, LNG for transportation, increased energy efficiency, etc. But the peak oil demand narrative forgets the most basic fundamentals of oil – industry has to add new oil supply every year to replace declines just to keep production flat. Even after today’s big oil rally, long dated strips are still under $52 from 2020 thru 2025. We don’t believe long dated 2020 thru 2025 strips are predictive of future prices or indicative of the marginal supply costs to add 4 to 5 million b/d every year in 2020 to 2025 or to add >3 million b/d every year once peak oil demand is reached and is in plateau. We believe these marginal supply costs are significantly higher and >$60. We believe oil can quickly move to a base of >$60 with this supply challenge and there will be longevity to this call as markets appreciate this challenge and that the marginal supply cost to add this much new oil production every year is well over $60. Peak oil demand won’t take away from the challenge to add significant new oil production every year.” Note that our Nov 6, 2017 blog was based on the spring 2017 Core Laboratories estimate that the global world wide annual decline rate in oil was then 3.3%. But to Core Laboratories support, this estimate would have been before the ~2.5 mmb/d of added US shale and tight oil in the past two years.