Over long time periods oil obeys the law of supply and demand. So let's look at demand:
After a big demand shock/recovery triggered by the 2008 financial crisis, the graph shows a pretty steady 1m bpd of annual demand growth. This despite flat/negative growth in the US (we're below 2004) and strong declines in Europe and Japan. The biggest demand story, by far, has been China (+4m bpd over the past decade). Other significant growers (in order of bpd growth since 2004) are:
Notice anything? This list is almost OPEC+Russia. So we've got China's growth slowing due to demographics and most other demand growers facing contraction due to $60 oil. Of course there will be some positive demand response from the big importers, but demand response is glacial and the big efficiency gains in Europe, Japan and the US have been driven as much by politics (e.g. CO2, jihad) as economics. Throw it all into a hat and I'd forecast 0.0-0.5m bpd annual growth vs. the 1.0m of recent years.
OK then, what about supply? OPEC likes stability, but someone isn't cooperating:
Graphs don't get much clearer than that. Forget Russia, Iran, deepwater and all that. OPEC's #1 problem is the "irresponsible" shale cowboys in TX and ND. Shale isn't a temporary disruption, like the demand shock of 2008. It won't cure itself in time. Cutting 2.5m bpd, as OPEC did in 2008, would only encourage the cowboys and make things worse in the long run. So the Saudis chose to maintain output and let oil prices find a new equilibrium. I'm here in part to get ideas on that new equilibrium, and I've read lots of good thoughts. My (somewhat random) input:
1. The Saudis believe the new equilibrium is ~$80. Even if they're right, they have CLEARLY stated they will let prices go as low as necessary to drive out "bad behavior". They don't really care who cuts - Russia, deepwater, shale, etc. Just be sure of one thing: it won't be OPEC. Expect a bumpy ride.
2. Shale rewarded speed, not efficiency. You got rich by outbidding everyone else for land and rigs then drilling as fast as possible. You couldn't really overpay but you could easily miss out. It was not a cost-conscious environment, to put it mildly. Suppliers made a killing. Newly licensed Eagle Ford truck drivers could make 80k/year, 100k+ with some experience. Wages went so high in North Dakota Wal-Mart had to pay $18/hour. Costs for rigs, supplies and labor will drop. Don't put too much weight on historical break-even prices.
3. CLR and LPI both slashed capex but still forecast production growth for 2015. If this this is legit, and typical, prices may have to go lower before the cowboys yank hard on the reins. COP just cut capex 20% but still expects 3% growth (ex Libya). They seem to be maintaining Eagle Ford and Bakken capex while deferring elsewhere.
4. Bakken production climbed pretty steadily through the 2008 crash. Perhaps oil prices didn't stay low long enough to change behavior, and I certainly expect more of a response this time around. But it's an interesting data point.
5. Despite lots of bad behavior, shale is not an unsustainable Ponzi. 10,000 Eagle Ford wells pumped a billion bbls so far. Even at $60/bbl that's $60b of revenue, which roughly pays back the capex to drill the wells (10k * $6m/well = $60b). The 1m or so bpd still flowing is mostly gravy. It's not much different in the Bakken - 8000 wells have produced about 850m bbls so far. Bakken wells cost more ($8-10m), so perhaps the capex hasn't quite been returned yet, but at 1.2m bpd it won't take long. Both of these fields look pretty profitable at $60/bbl. Especially if drilling costs decline.
6. Bakken rig count has declined about 10% (to 172). Eagle Ford seems to be holding around 260 rigs. But permits are down 30%. I lack hard data, but my gut says $60 oil will cause US oil output to grow more slowly in 2015. But it will still grow. $40 oil would be a different story.
Please correct my errors and omissions. And keep up the good discussions!