US production decline is accelerating and not as resilient as initially purported.

The global oil market is now undersupplied.

Based on current US rig count, the global oil market will be significantly more undersupplied by 3Q17 than it was oversupplied in 2Q15 (2.2 MMbopd) when OPEC flooded the market.

Production from “tight” source rock is a game changer

Over the 35-year period from 1937 to 1972, US oil production increased 6 MMbo/d, primarily from conventional sources, and then declined 5 MMbo/d over the next 38 years, resulting in the USA’s unhealthy dependence on imported oil, the rise and fall of a well-functioning cartel, $100+ oil, fear of Peak Oil, and T. Boone Pickens’ famous prediction/warning a decade ago of the “possibility for the greatest wealth transfer in the history of mankind”. The commercial development of “tight” oil shale, starting with the Bakken, changed everything and has put the US on the path to energy independence, as US oil production almost doubled from 2009 to 2014. This rate of growth is unparalleled and not even the discovery of the 100+ billion barrel mega-giant oil field “Ghawar” in Saudi Arabia in 1948 can match it.


OPEC has not always been in disarray

The last time you could buy a gallon of gasoline for ~$0.70 / gallon was 1997-1998. During that 2-year period, Saudi intentionally flooded the market, primarily to punish other OPEC members for not adhering to quotas, and drove oil prices all the way down to a bottom of $10.82/bbl on December 10, 1998. After enduring two years of pain, the rest of OPEC essentially said “no mas,” we will do whatever you like Saudi and the “price band mechanism” was adopted in 1999. The initial band was $22/bbl to $26/bbl whereby OPEC removed supply when oil prices fell below $22/bbl and added supply when oil prices exceeded $26/bbl. Later, OPEC moved the band higher with the official floor reaching $80/bbl at one point before doing away with it altogether.