American Oil and Gas Reporter - April 2017 - 123

day, almost as low as it had ever been.
Berman said OPEC preferred to make
the production decision seem like a rational business decision rather than an
announcement that it had reached the
commercial limits of its surplus. He
pointed out that earlier OPEC production
caps had boosted prices on the order of
$20 a barrel, not the $5 increase seen
after its latest move.
Globally, the supply and demand balance is improving, Berman reported, with
the production surplus as much as 1
MMbbl/d matched by demand growth, a
jump he declared average for the world
market.
"The important thing is at the end of
2016, consumption growth was 1.3 MMbbl/d, which is not bad. It is better than
we thought, but less than the average
since the financial collapse," he described.
"That is a problem, because oil prices in
2016 were the lowest they have been for
12 years, adjusted for inflation. So, with
the lowest prices we had seen for a long
time, demand still was mediocre. That is
worrisome."
Comparative inventory is the key to
assessing oil industry health, Berman
offered. He examined inventories held
by members of the Organization of Economic Cooperation and Development,
pointing to a perfect inverse correlation
between prices and comparative inventories. According to OECD, those comparative inventories are at all-time highs,
and a cumulative 300 billion barrels.
Berman estimated inventory must be at
or near zero before oil has any hope of
climbing above $70 a barrel. He added
that the magnitude of the surplus suggested oil prices should be down to $10,
but expectations concerning OPEC's
production cuts were supporting $40
pricing levels.

Energy analyst Art Berman (center) visits with Illinois Oil & Gas Association Executive
Director Sam Barbee (left) and incoming IOGA President Craig Hedin before his keynote
address at the association's annual convention.

Domestic Oil
U.S. oil production dropped 1 MMbbl/d
from spring 2015 to September, but has
begun to increase again, Berman said.
The latest U.S. Energy Information Administration projections show domestic
output will be slightly less than 10 MMbbl/d by the end of 2018, he cited.
"The more interesting part of the EIA
forecast is prices," Berman added. "It
shows the West Texas Intermediate price
will fall to $49 a barrel, and stay there
through mid-2016, and will never reach
$60 for the duration of the graph, which
is the end of 2018. I don't believe in
forecasts, but I kind of believe in this
one. It is reasonable, maybe for all the
wrong reasons."
The U.S. rig count has climbed consistently since early 2016, he noted. It is
up sharply since OPEC announced its
production cut in September, he said,

Jim Brooker, president of Brookston
Resources Inc., points to an oil forecast using data from Shaleproﬁle.com
that indicates the United States is
facing a long-term production decline.
He told the Illinois Oil & Gas Association declining Bakken Shale output
was one contributor.

adding low staffing levels in fracture
crews may prove a significant handicap
to continued supply growth. However,
Berman predicted likely production increases totaling 1.5 MMbbl/d from Nigeria
and Libya would cancel out the cartel's
cuts.
With domestic production climbing,
Berman noted, U.S. crude oil inventories
are at an all-time high of 520 million
barrels.
"That is 44 million barrels above last
year, which was the highest on record,
and 140 million barrels above the fiveyear average," he assessed. "We have to
bring inventories down to something like
140 million barrels in order to get to
where we need to go. U.S. crude oil comparative inventories tell same thing that
OECD does: We are about $6-$7 a barrel
higher than we should be. Eventually,
things get back to fundamentals. We are
overvalued right now."
Bakken Prediction
The Bakken Shale's declining output
is another issue with the potential to
affect U.S. production, Berman warned.
Production in the play dropped 9 percent
in December, a continuation of a trend,
he said. While there is more than 1.2
million acres within the Bakken's most
productive region-with 5,500 producing
wells-he said a range of indicators suggested the play was depleted.
"The decline rates on recent Bakken
wells are huge," he described. "The forecast is 2017 production will be 30 percent
lower than in previous years. Gas/oil
ratio is getting worse every year. That is
a real bad trend. It is the same for water
cut: every successive year, the water cut
goes up."
APRIL 2017 123

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American Oil and Gas Reporter - April 2017

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