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Even though we have a slightly defensive tone, the grain and soy complex looks a bit ho-hum this morning. Fresh news is lacking; no new exports sales have been reported, at least as of yet, and clear skies hold promise for increased harvest activity in the days ahead. Then toss in higher trade in the U.S. Dollar and pressure in metals, and you have all the needed ingredients to mix up a negative tasting recipe. One exception in the commodity realm this morning are the energies. While I have commented over the last couple days about the performance of crude as well as commodity indexes during the past several months, there have been some interesting developments, outside of OPEC, that are worth pointing out to keep in perspective for the days (years) ahead.
Back in the 1950’s a geologist with Shell Oil by the name of M. King Hubbert, published the theory of Peak Oil, which was often referenced as Hubbert Peak Theory. One of the realities of oil extraction is that there is a point where the “well” or reserve will reach peak extraction and after that, the output begins to decline overtime. The effect of this has been counterbalanced by new discoveries of reserves in the Middle East, Russia, North Sea, South American and more recently shale production but progressively they have become more expensive to drill for, not to mention some of the environmental concerns. On the domestic front, Hubbert had predicted that U.S. crude production would peak sometime in the early 1970’s, which for a while it did, but the new technology of fracking changed all of that in the last decade. While this shift unquestionably threw the peak theory a curve ball, it does not change the geological fact that any and all oil reserves peak and recent data may be suggesting that the shale production explosion may be doing just that.
Due to the fact that there are a number of wells that have been drilled but not put into production, referred to as DUC’s (Drilled but UnCompleted), the jury is still out as far as the total production capabilities, but over the past year, the output from the major shale fields across the U.S. has either flat-lined or gone into decline and this even after the major advancements in horizontal drilling. This is not to say that some “newer” technology could not be revealed that can boost production once again but ultimately Hubbert’s theory remains correct; production in any reserve and by extension globally will peak.
I suspect that this is something the average individual and investor have given little consideration to over the last few years, assuming that with the new finds and the new technologies, high priced energies are a thing of the past. Once again, assuming anything can lull us into complacency. Markets have a way of revealing underlying shifts before they become evident to the masses and possibly the resiliency we have witnessed in crude is a forewarning of what is yet to come.
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