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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The No.1 Challenge To The Oil Rally


The oil price rally could get derailed by “explosive” growth from U.S. shale in 2018, and “substantial gains” in Canada and Brazil will also add to the supply woes.

The International Energy Agency (IEA) acknowledged in its latest Oil Market Report that the recent rally in oil prices came on the heels of significant tightening, but that the supply picture still looks ominous.

The rally in Brent prices to $70 was driven in part by some unexpected interruption and geopolitical tension, including the possible unraveling of the Iran nuclear deal, the closure of the Forties pipeline a few weeks back, disruption in Libya, and the steep decline in Venezuela’s oil production.

Inventories also continue to decline (for the time being), and even picked up pace at the end of last year. The IEA said that OECD commercial stocks declined by 17.9 million barrels in November, a pace that was twice as fast as the five-year average. And, in December, preliminary data suggests the declines were even stronger.

In fact, inventories declined in three consecutive quarters in 2017. On average, inventories fell at a rate of 630,000 bpd, which the IEA said was exceptional. “[S]uch a threesome has happened rarely in modern history: examples include 1999 (prices doubled), 2009 (prices increased by nearly $20/bbl), and 2013 (prices increased by $6/bbl).” This time around, the stock draw pushed up Brent prices by almost $25 per barrel. “The oil market is clearly tightening,” the IEA wrote.

Related: The Biggest Oil Collapse In History

In this sense, it is not as if the surge in positioning from hedge funds and other money managers is unjustified — the underlying fundamentals point to a real tightening underway in the physical market for crude oil.

However, soaring supplies from the U.S. and other non-OPEC countries threaten to stall the rally. The IEA raised its forecast for U.S. oil production growth this year from 870,000 bpd to 1.1 million barrels per day (mb/d). That comes on the heels of sharp upward revisions from the EIA and OPEC, not to mention a slew of investment banks. Everyone is in agreement on one thing: U.S. shale is set for serious growth, much more than analysts predicted just one month ago.

“The big 2018 supply story is unfolding fast in the Americas. Explosive growth in the US and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico,” the IEA wrote.

“It is possible that very soon US crude production could overtake that of Saudi Arabia and also rival Russia’s.” Russia produces more than 11 mb/d. The U.S. EIA predicted earlier this month that the U.S. would top 11 mb/d by the end of 2019.

But it isn’t just the U.S. adding new barrels to the market. Brazil and Canada are two other non-OPEC countries expected to post strong gains, although, unlike short-cycle shale, both countries have projects set to come online that were planned years ago.

Even after factoring in some non-trivial declines in output from Mexico and China, the IEA sees non-OPEC production rising by 1.7 mb/d in 2018, a figure that represents “a return to the heady days of 2013-2015 when US-led growth averaged 1.9 mb/d,” the IEA wrote. Related: Are Hedge Funds Pushing Oil Prices Too High?

For oil bulls, that should be a pretty threatening figure because demand is only expected to grow by 1.3 mb/d this year. The IEA acknowledges that its demand estimate could be conservative, but it takes into account the fact that some demand destruction could occur from higher prices. OPEC pegged demand growth at a healthier 1.5 mb/d, but even that figure is swamped by the 1.7 mb/d of new supply.

The result could be a return to increases in inventories, testing the current rally in prices. The IEA sees a “modest surplus” in the first half of the year, followed by a “modest deficit” in the second half.  As such, forecasts for $60-$70 for Brent seem reasonable, but that “we should expect a volatile year.”


For now, oil prices are struggling to hold onto their gains — Brent has hit the $70 per barrel threshold, but has fallen back at that resistance level.

By Nick Cunningham of Oilprice.com

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  • Mark Madson on January 21 2018 said:

    Article states that the market is currently 630,000 bpd under supplied. So if new supply is 1.7 mbpd and new demand is 1.3 mbpd in 2018...doesn't that make the market will be 200,000 and change under supplied in 2018? Instead of 'overwhelmed' by supply?

    That's with very optimistic supply as well.

  • Mamdouh G Salameh on January 22 2018 said:
    Let me first point out that Brent prices were overwhelmingly driven by rising global demand for oil and a fast re-balancing in the market. This time geopolitics hardly showed on the radar. The reason is that the market neither believe even for one minute that Venezuela’s oil production will collapse nor that Iran’s oil production will be adversely affected by an exit by the United States from the nuclear deal.

    Let me tell you something else. The US Energy Information Administration (EIA), the International Energy Agency (IEA), BP’s Annual Statistical Review of World Energy and the Financial Times are four of a kind. They represent the interests of the main oil consumers (mostly Western consumers) and they, therefore, have vested interest in dampening the rise of oil prices.

    The IEA swallows hook, line and sinker claims by the EIA regarding rises in US shale oil production in 2018 and 2019 and repeats them as if they are their own research. BP and the Financial times join the bandwagon be repeating the same claims virtually verbatim.

    This claim by the IEA that the United States will overtake Saudi Arabia and Russia to become the world’s number 1 producer is a pipedream.

    The same claim was made three years ago by BP in its 2015 issue of its Statistical review of world Energy when they reported that the United States overtook Russia and Saudi Arabia in 2014 to become the world’s largest oil producer. That claim was proven false when OPEC Annual Statistical Bulletin showed US production to be 8.76 million barrels a day (mbd) compared to Russia’s 10.09 and Saudi Arabia’s 9.71.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Paul on January 23 2018 said:
    Due to the extended period of low oil prices combined with anti-growth anti-fossil fuel economic agenda held around the world for decades, oil prices will eventually spike.

    Big governments suffocated the middle class and snuffed out economic mobility, effectively destroying the middle class.

    The middle class in the USA began its recovery in 2016 after declining for 5 decades. I expect this period of improving conditions to last 20-30 years.
  • the masked avenger on January 24 2018 said:
    Mamdouh blurts out more of his garbage. Please stop, you arent a guru of anything but your own self-important dreams.
  • Geopolitician on January 30 2018 said:
    @Dr. Salameh

    -It would be silly to assume that the Western owned Oil majors -- who all hope for high prices -- have no influence among FT, the EIA, and the IAE. BP does not want lower oil prices, period.

    -With Russia and Saudi committing to production cuts and higher energy prices spurring shale production, it's not crazy to think that the U.S. could emerge as the world's #1 crude supplier.

    -I believe the 2015 BP report included NGL's, making the U.S. the #1 Liquids producer.

Leave a comment

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