Shale: They just don’t get it

March 6, 2018 • Reprints

Shale predictions and price predictions, sometimes they just do not get it. According to an article in today’s Financial Times, OPEC is shocked by how many hedge funds really have no clue about how the oil market works. OPEC’s Secretary General Mohammad Barkindo, who met with hedge fund managers, seemed shocked that many of them had no “basic understanding” of oil and were less savvy than was widely assumed.

While it is not necessary for hedge funds to understand the market fundamentals, it does shed light on one of the concerns that I have been raising. I feel that a basic misunderstanding about shale oil and its limitations could be setting the stage for a future supply squeeze down the road.

I am not alone. The Wall Street Journal reported that a shale trailblazer turned skeptic on soaring U.S. oil production. The Journal reported that a former  EOG Resources Inc.’s CEO questioned growth forecasts, saying U.S. oil isn’t a “big bad wolf” disrupting energy markets.

The Wall Street Journal also reported that one of the pioneers of the U.S. shale boom plans to deliver a surprising message at a major energy conference here this week: U.S. oil production won’t keep growing as fast as the market seems to think.

Mark Papa, the former chief executive of industry bellwether EOG, said in an interview he is eager to tell the assemblage of oil chieftains that a widely held view that shale-oil producers can quickly ramp up production, and sustain those levels if needed, is wrong.

“The oil market is in a state of misdirection now,” said Papa, now head of smaller shale company Centennial Resource Development Inc., suggesting future supplies might be more constrained than experts believe. “Someone needs to speak out,” he says.

Well, we have been speaking out. The Energy Report has long warned that the market was overestimating shales ability to replace more traditional jects. Years ago, we warned that the market was underestimating shales potential impact and in recent years we warned that the market was overestimating shales ability to replace traditional energy portion. We warned that shale’s large decline rate and its logistics and the independent nature of the producers would make it impossible for shale oil process to replace Saudi Arabia and OPEC’s role as swing producer. We also warned about the financial fragility of some of the producers. We also warned that we can’t trust in shale alone.

That is one reason why oil is soaring despite predictions by the International Energy Agency that the U.S. will see a shale production surge. The reality is that while production will rise, current production is not meeting demand. The market rallied hard on a report by Genscape that oil supply in Cushing, Okla., continues to drain, by an additional 660,000 barrels in the last few days. That does not fit the bearish narrative. Global supplies are also draining at a time when you expect them to be rebuilding.

When oil did that double dip in 2015, many thought it was because of shale and the glut but it was because many hedge funds did not understand the fundamentals. They thought the “lower for longer” mantra would work out, or that somehow shale oil would learn to love oil in the twenties and prosper. Instead, we were sowing the seeds of the most significant bottom in oil in a generation. Now, many are starting to see what we saw back then and that is why oil is doing as well as it is now.

I spoke about that historic bottom on the Fox Business Network back then. That is why you must stay tuned to that network, so you don’t get the same old business and the popular talking points on the markets. That is why Fox Business is the best in business!

Late breaking news! North Korea’s leader, Kim Jong-un, has told South Korean envoys that his country is willing to begin negotiations with the United States on abandoning its nuclear weapons and that it would suspend all nuclear and missile tests while it is engaged in such talks, according to South Korean officials. That should give stocks a bounce and is a win for President Donald Trump.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world’s leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at Learn even more on our website

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