Domestic production looks set to peak, with some profound implications for the world market.
Intense focus on the North American shale boom, Saudi Arabia, and ISIS obscures an important emerging energy trend: China’s oil production is peaking. This has profound implications for the world oil market, because China is not just a massive importer of crude; it is also among the world’s five largest oil producers, trailing only the U.S., Russia, and Saudi Arabia, and virtually neck-in-neck with Canada.
China’s oil industry has delivered impressive oil and gas production growth over the past decade. Yet a range of data and historical analogies increasingly suggest that, at global oil prices between $50-to-$100 per barrel, China’s oil supply capability is plateauing and may peak as soon as this year. Lower or higher prices would accelerate or extend this timing.
Strategic Implications
The latest IEA data estimate that China’s crude oil output in 2015 will average 4.3 million barrels per day. This is likely to be the high-water mark for China’s domestic oil production, as oil price uncertainty and disruption from anti-corruption investigations trim oil executives’ risk appetites in 2015. CNPC and CNOOC, in particular, are very upstream focused and will not drill as aggressively with investigators sniffing around while oil trades at a bit more than half the price it fetched a year ago. But such tactically driven activity declines should not obscure the underlying strategic story: China would still very likely be at peak oil production this year even if oil prices were closer to $100 per barrel.
Looking out to 2020, tight oil output may well increase if drillers can “crack the code” of China’s ductile lacustrine shales. But this oil would simply slow the stasis and impending decline in national crude oil output. The Chinese oil patch does not appear to have any world-class unconventional oil plays like the Bakken, Eagle Ford, or Vaca Muerta poised to emerge within the next five years in a way that would reverse the emerging peak production situation.
It is increasingly likely that if new unconventional oil resources become commercially productive in China, by that time their output will simply compensate for depletion of existing conventional oil resources, rather than actually boosting net oil output as has been the case in the U.S. As things stand, the evidence increasingly points to a future where China’s national oil companies will preside over a gradual crude oil production decline that begins now, in 2015.
DYI Comments: Now is an excellent time to dollar cost average into your favorite oil/gas/service company mutual fund. DYI's favorite fund is Vanguard's Energy Fund symbol VGENX excellent management and low cost(0.37% expense ratio). With share prices down and yields up setting up the possibility of future profits for the long term investor.
Please note I only advocate dollar cost averaging as the U.S. and world economy is barely staying away from another recession. If that occurs and oil prices are driven down to a $20 dollar handle or lower then lump summing would rule the day as this price would rebound as the world worked its way out of the recession. If prices go this low you may want to look into the closed end fund Adams Natural Resources Fund (NYSE: PEO).
The world is at peak oil with prices in a secular uptrend but on cyclical roller coaster all determined by geo politics and economics. Which way will prices go from here? How this for honesty....I have no idea! I know this, prices have been pounded down creating excellent opportunity for the contrarian value player. If prices get smashed due an economic downturn I'll lump sum into PEO.
DYI
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