The holiday season is suppose to be a heartwarming one with visions of sugar plums, crackling fireplaces and hot chocolate. But the gloom and the doom of the oil patch continues and some say the outlook for next year isn't that heartwarming either.
Low oil prices for much longer will once again put the spotlight back on U.S. shale production, which has lost only about 300,000 barrels per day since peaking in April at 9.6 mb/d. The latest EIA data shows that output fell by just 20,000 barrels per day in September, a stubbornly small decline given how low oil prices are trading nowadays.
But OPEC members, mostly driven by state-backed production, won’t reduce their output. OPEC production is not driven by market forces; each individual country produces as much as possible. By failing to agree on a target cut, that trend will continue, if not increase. Iran has cleared just about all of the remaining hurdles to its comeback, and once sanctions are removed in January 2016, it could quickly increase output.
So, just as before, the contraction in supply will have to come from higher-cost production, notably U.S. shale. The financial pressure should increase on shale producers for a few reasons, all of which point to a sharper contraction in the months ahead.
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