X

Sign Up To Our Free Newsletter

Join Now

Thanks for subscribing to our free newsletter!

ERROR

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

  • 3 minutes Texas forced to have rolling brown outs. Not from downed power line , but because the wind energy turbines are frozen.
  • 7 minutes Scientists Warn That Filling The Sahara With Solar Panels Is A Bad Idea
  • 11 minutes United States LNG Exports Reach Third Place
  • 15 minutes Joe Biden's Presidency
  • 3 hours IS SAUDI ARABIA SENDING A MESSAGE TO BIDEN
  • 1 day America Makes Plans to Produce Needed Rare Earth Minerals Domestically
  • 8 hours Texas forced to have rolling black outs, primarily because of large declines in output from fossil fuel power plants
  • 1 day U.S. Presidential Elections Status - Electoral Votes
  • 3 days Former BP Exec "Biden not in war against oil" . . Really ?
  • 3 days Here we go - again: plug-in hybrids cost motorists more than what they were told
  • 3 days Texas Supply Chain Massacre
  • 1 day Top Conservative Lawyer Says Trump Can Stand Trial
  • 1 day “Cushing Oil Inventories Are Soaring Again” By Tsvetana Paraskova
  • 3 days An exciting development in EV Aviation: Volocopter
Osama Rizvi

Osama Rizvi

Osama Rizvi is an economic and global oil market analyst who brings in a holistic point of view connecting geopolitics, economy and politics. He has…

More Info

Premium Content

Deciphering Today’s Oil Markets

The EIA reported a crude build of 8.2 million last week, the 9th consecutive weekly inventory rise, with oil prices later plunging 5.3 percent. The sudden drop in oil prices was the first time oil had broken out of its narrow trading range in several months. Since then, bearish sentiment has gripped the markets, with oil prices tumbling at the start of this week. Despite the downward trend, uncertainty over the future of oil prices remains, with analysts strongly disagreeing on the central factor in today’s oil markets. To make sense of today’s oil market there are three key concerns that should be understood: The shale boom, global crude supply and the Vienna deal.

The Shale Boom- Goldman Sachs says that a new chapter in the history of oil is in the making, terming it the “New Oil Order” in a recent report. Jeff Curie, Head of Commodities Research at Goldman Sachs, says that the New Oil Order will see U.S. shale controlling markets. Shale, an unconventional oil resource which used to incur heavy costs, is now adapting to the current market situation and becoming increasingly efficient. According to Michele Della Vigna, non-OPEC producers in the past struggled with lead times of 5-6 years and almost 10 years of payback time for different oil projects. U.S. shale has now changed this, with a lead time of less than a year and a payback time of 1.5 years. This represents the significance of shale, which will always be a central driver of future oil prices.

The U.S. is not the only place where shale is soaring high. Argentina has 802 trillion cubic feet of natural gas and 27 billion barrels of recoverable oil reserves, including the Vaca Muerta, which holds 60 percent of the country’s oil resources. Yacimientos Petrolíferos Fiscales (YPF), the Argentinian oil giant, has recently penned deals with Sinopec and Gazprom. President Macri is very hopeful for the future of oil in Argentina. He has been able to lure companies to invest $15 billion a year in return “for lower labour cost and extended state subsidies”. Related: Saudi Arabia’s War On Shale Never Ended

Concern for supply as new E&P projects go down - In its recent report, the IEA said that “global oil supply will lag demand after 2020 until new investments are approved”. Citing the huge cuts in new E&P projects during the course of past 2 years, the Agency predicts that there will be a supply demand gap if new oil projects don’t comes up.

On the other hand, Wood Mackenzie predicts “spending to rise by 3 percent to $450bn after two years of cuts.” Although 40 percent below the levels of 2014, this is indicative of a revival in E&P projects. Not to forget that the U.S. shale supply, which has surpassed 2014 levels, may be able to alleviate the supply fears. The IEA itself observes that “The United States responds more rapidly to price signals than other producers. If prices climb to USD 80/bbl, U.S. LTO production could grow by 3 mb/d in five years”. And according to WoodMac analyst, Tom Ellacot, “Production in the most attractive shale areas, particularly in the Permian basin in Texas, is currently profitable with oil at $40 to $60 a barrel”. Once again turning to Goldman Sachs, Mr. Michelle Della Vigna explains that “shale has substituted more complex, heavy oil, deep water projects, so we estimate that between $700bn to $1.3tn of projects will not be needed any longer”.

Adding to this the reduced lead and payback time mentioned in the start of the article, supply concerns appear to be less pressing. Related: Will Trump Send Oil Prices Crashing?

The Vienna Oil Deal- Despite continuing concerns, the deal has been relatively successful. Now in its third month, the 90 percent compliance rate is astonishing. But is the deal proving to be as effective in moving oil prices as OPEC hoped? Take a look at the increased rig count and inventory levels which have now crossed the 520 million mark. Also, as explained many times before, the threat of rising production from Libya and Nigeria cannot be ignored. While promises are good for speculative price increases, the Russians seem to have backed off from their commitment as the recent production figures suggest. There are talks of extending the oil deal to another six months, which may happen, but what is certain to happen is the increase in production from the shale side, especially as prices become more stable and lucrative. While Saudi oil minister, Khalid Al-Falih, has said that he won’t allow ‘free-riders to take advantage of the rising oil prices’, no concrete plan has been shared as to how he intends to follow through. Yes, the Vienna Oil deal is proving helpful, but only for maintaining a balance in the markets. Not in reducing the supply---at least for the longer term.

So, at one end there are concerns for the shortage of supply, and on the other shale is ready to fill the markets with black gold. The OPEC deal is sucking up some extra barrels, but for how long? The above-mentioned paradox is proving very tricky. Recent oil price movements may be pointing to a return of volatility in markets, or perhaps the OPEC deal really is starting to play second-fiddle to U.S. shale production, each investor must look at the abovementioned elements and decide for themselves what is really moving oil markets.

By Osama Rizvi for Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Tom on March 15 2017 said:
    You write "So, at one end there are concerns for the shortage of supply, and on the other shale is ready to fill the markets with black gold. The OPEC deal is sucking up some extra barrels, but for how long? The above-mentioned paradox is proving very tricky."

    Maybe the key question to this conundrum is demand? Stockpiles are very high right now. And renewables are gaining ground every day. At the same time, economic growth seems in peril lately and we don't even know if a new growth is coming with more oil consumption.

    So maybe we need to focus on true and better prediction of demand: the EIA has systematically underestimated renewables in the past. This is dangerous to investors today...
  • Osama on March 15 2017 said:
    Yes, I totally agree. Demand is the key. You can see my other piece Are Oil Markets ignoring demand...for further reading.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News