U.S. oil production continues to rise, threatening to offset much of the output reductions from OPEC, and yet again pushing out the time horizon for the oil market balancing. There is a growing consensus that oil prices will remain below $60 per barrel in 2017 even if OPEC decides to extend its production cuts by another six months.
Estimates for the rebound in U.S. shale vary, but they differ only on magnitude and not on trajectory. Nearly all major oil analysts and investment banks see a strong resurgence in shale output.
Production gains are already more or less baked in for the next few months. Rig counts have surged roughly 90 percent since last May, with sharp gains since OPEC announced its deal in late November. However, gains in production often lag behind increases in the rig count by a few months, meaning that gains U.S. shale production stemming from those additional rigs have yet to show up in the data.
Even still, output is already up by more than 400,000 bpd in the last six months, with the latest weekly EIA data showing overall U.S. oil production topping 9 million barrels per day for the first time in almost a year. Those gains, however, come largely from new offshore projects coming online, not necessarily from large jumps in shale output. In other words, shale gains still have a lot of room to run since drillers are in the early stages of renewed drilling. As a result, the gains in output are more or less just getting started. Related: Have The Majors Given Up On Canada’s Oil Sands?
So how much output will come back in 2017? It depends on who you ask. At one end of the spectrum there is Macquarie and Rystad Energy, both of which are projecting an increase of 900,000 bpd by the end of the year. JP Morgan is a little more cautious, expecting gains of 400,000 bpd.
Ole Hansen, chief commodity strategist at Saxo Bank, told Bloomberg Briefs that access to capital on generous terms will also aid the recovery in shale production. "The combination of a collapse in the cost of borrowing and increased hedging opportunities following the latest price rally has put U.S. shale oil producers back in business," Hansen said in an emailed statement. "Instead of cutting cost to meet the punitive borrowing cost witnessed a year ago they can now look ahead and begin making plans to expand production."
Rising shale output will go a long way to offsetting the cuts underway by OPEC members, who have collectively taken about 1 million barrels per day off the market since January, with a target of a 1.2 million-barrel-per-day reduction averaged over six months.
OPEC’s deal has succeeded in creating optimism in the market, and hedge funds and other money managers continue to stake out evermore bullish positions on crude prices. Even as prices have stagnated, stuck in the mid-$50s, investors have piled on more and more bets that prices will rise. The latest data shows yet another new record of net-long positions.
But oil has not been able to break out of its narrow trading range. As a result, the effect of the OPEC deal on prices has already reached its limit. With nearly full compliance, oil is still stuck trading in the $50s. Reuters reports that Saudi Arabia wants oil to rise to $60, but few analysts think that will happen in 2017. Related: Cooking The Books? Saudi Aramco Could Be Overvalued By 500%
Flat oil prices since the start of 2017 has been accompanied by rising oil inventory figures in the U.S., and OPEC is now thinking that it might need to extend its deal for another six months through the end of 2017. More and more analysts are coming around to the idea that if OPEC wants to avoid another price meltdown, it had better extend the cuts. But a survey of 31 analysts and economists by Reuters found that even if OPEC extended the deal, oil prices could still wallow in the $50s.
To be sure, the OPEC cuts will help move the market at least in the direction of a supply/demand balance. Citigroup predicts global oil inventories will fall every quarter of this year, draining the surplus.
However, towards the end of the year things could get worse again, mainly because of rising shale production. "We expect crude markets will be in deficit in the first three quarters of 2017 and then they could swing into a small surplus in the fourth quarter amid rising non-OPEC supply," Daniela Corsini of Intesa SanPaolo told Reuters.
In summary, rising shale production could negate much of OPEC’s efforts, leaving crude bouncing around in the $50s per barrel for much of 2017.
By Nick Cunningham for Oilprice.com
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