Worldwide oil supply 1986 vs. 2015oil supply
1986
Global production................ 58 million bopd [ref 1]
Global spare capacity............ 10 million bopd [ref 1]
Compound Annual Decline Rate..... 1.5%
58,000,000 * 1.5% = 870,000 bopd of natural declines (this is the nominal amount that the 1986 wellstock would decline in the event of no new drilling)
=> To keep production level the industry had to drill and complete 870,000 bopd each year.
=> The industry had to drill and complete 2,383 bopd per day.
However in 1986 there was 10 million bopd of spare capacity already drilled and completed.
10,000,000 bopd / 2,383 bopd per day = 4,195 days = 11.5 years of natural production declines were already drilled and completed. There was no need to drill any more wells, there was no near/mid term need for rigs at all.
^^That is what an oil glut looks like!
In 1986 with over a decade of spare capacity, there was absolutely zero reason to drill and complete new wells. The industry had to wait for demand to rise in order to reduce the surplus.
2015
Global production................ 95 million bopd
Global spare capacity............ 3 million bopd
Compound Annual Decline Rate..... 5% (6% with everyone pumping like crazy to claim market share)
95,000,000 * 5% = 4,750,000 bopd of natural declines
=> To keep production level the industry had to drill and complete 4,750,000 bopd each year.
=> The industry had to drill and complete 13,013 bopd per day.
Today in 2015 there is just 3 million bopd of spare capacity already drilled and completed in the world.
3,000,000 bopd / 13,013 bopd per day = 230 days = 7 months of natural production declines are already drilled and completed
^^This is the tightest spare capacity since 1945!!
This is not an oil glut, it is a price war. The two are fundamentally extremely different.
Because a price war has exactly the same impact on fiscal year 1 as an oil glut the bean counters have (catastrophically) misread the current situation as analogous to 1986.
The oil market is highly complex and esoteric. but please bear in mind the following points.
1). Global spare capacity was 5 million bopd in 2014 [2] today it is 3 million bopd. Online production is flatlining but spare capacity is falling? Think about that. The decline rate is pulling the spare capacity down, because production that is online declines, and spare capacity comes online to replace it. But the spare capacity is not being replaced.
The current oversupply situation is incredibly fragile. It is not sustainable over a long period of time.
With all else remaining equal (stable demand, continuation of market share policy, continuation of OECD output), then you would expect to see global spare capacity continue to contract until there is no more spare capacity. At that point the 2 million bopd oversupply will then begin to contract. Then supply and demand will balance. Then there will be a shortage of supply.
The market will wake up to one of these milestones before they come to pass, but which milestone will trigger a reaction?
My guess is that as spare capacity is the most sensitive bucket of the wellstock, when spare capacity contracts to less than 1million bopd the market will figure it all out and then we are quite likely to flip into a big price shock. Iran is due to come online with around 1,000,000 bopd but that isn't much in the face of the current decline rate and the drilling slowdown.
This is not 1986, the crisis is not L shaped. This is a J shaped situation and right now we are somewhere on the downslope of the J.
[1] https://www.opec.org/opec_web/static_files_project/media/down...
[2] https://www.euanmearns.com/wp-content/uploads/2015/06/OPECspa..