Oil is booming, but the US may spoil the party

Gladys Abbott
January 16, 2018

The tone of the market was set early in the week as investors reacted to a decline in US drilling activity the week-ending January 5 and optimism over the OPEC-led production cuts.

"On the other end, broad undersupply through underperforming shale and a firm commitment to holding the petrostate production cuts could lead to ongoing inventory declines to even tighter levels... meaning front month Brent prices could move firmly into the $70-80 range, even without supply disruptions."
US production is now forecast to rise to 10 million barrels a day by next month, fully four months faster than previously expected.

However, the market anticipated - rather demanded - the Opec and non-Opec agreement of reducing production by 1.8 million barrels a day (mbd) to be extended to the end of 2018. Although the cost of production in the United States has fallen significantly since 2014, that might not be enough to spur another revolution elsewhere, given the high cost of extracting unconventional resources in Russia, China, and many other countries. In both 2018 and 2019, EIA expects total global crude oil production to be slightly greater than global consumption, with US crude oil production increasing more than any other country.

The UAE sees no big changes in OPEC policy as a result from short-term price fluctuations, Energy Minister Suhail Al Mazrouei said at the conference in Abu Dhabi.

"The market is telling potential sellers to back off or risk being stopped out, and such is the current mood that bullish news tends to get more attention than potentially bearish signals", Saxo Bank's Head of Commodity Strategy, Ole Hansen, said in an article on January 10.

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As Asian demand for crude oil and petroleum products increase, supply considerations to transport crude oil to Asia are increasingly part of the price formation for global crude oil benchmarks. The U.S. rig count is an early indicator of future output.

The recent surge in prices may not last and if it does may not be in the long-term interest of Opec and its associates as it will spur a new wave of increased production, not only in shale but in oil sands and deepwater oilfields. "There is no need to rush and put assumptions (about) what are we going to do".

According to the country's economy ministry, total oil production climbed 10.5 percent to 86.2 million metric tons in 2017 from the year before - which implies that Kazakhstan's output in November and December was about 130,000 bpd above the OPEC target; moreover, Kazakhstan is said to be planning to increase production to 87 million tons this year, or about 1.81 million bpd compared with an OPEC target level of 1.74 million barrels.

A "perfect storm of events" is behind the price appreciation such as "cold weather in North America, unrest in Iran, strong economic growth and technical buying from hedge funds and other money managers". ANZ bank said the jump came "as shale producers quickly reacted to the strong rise in prices in 2018". There is so much to watch in this oil market. Vienna-based consultancy JBC Energy is concerned over the increased US output.

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