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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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OPEC vs Shale: The Oil Saga Continues

Refinery

The continuous rise in U.S. shale production last year offset part of the OPEC–Russia production cuts and capped oil price gains. Supported by the global inventory drawdown and geopolitical woes, however, oil prices rose steadily in the fourth quarter of 2017 to end the year at above $60 per barrel WTI and $66 per barrel Brent.

As we roll into 2018, the higher oil prices continue to drive increased U.S. shale production, and set the stage for yet another year of the OPEC-shale tug-of-war that will influence the price of oil. According to analysts, the $60-plus WTI price isn’t sustainable in the near term, barring geopolitical risks that could push prices up.

The U.S. Energy Information Administration (EIA) expects U.S. crude oil production to have averaged 9.2 million bpd for all of last year. It expects U.S. crude oil production to average an all-time high of 10.0 million bpd this year, which would beat the current record set in 1970.

As well as this 800,000 bpd average increase in 2018, compared to 2017, the EIA expects global liquid fuels demand to rise by more than 1.6 million bpd this year, up from 1.4-million-bpd growth in 2017.

“Demand growth is not forecast to keep pace with supply growth, however, resulting in global liquids inventories increasing modestly in 2018,” the EIA said in its December 2017 Short-term Energy Outlook.

In last month’s Monthly Oil Market Report, OPEC said it expects excess global inventories to arrive “at a balanced market by late 2018.”

While OPEC producers have decided to roll over the production cuts through the end of 2018, non-OPEC supply will increase more than previously expected, and total supply growth could exceed demand growth next year, the International Energy Agency (IEA) said in December’s Monthly Oil Market Report.

Related: Will Oil And Gold Prices Rise This Year?

According to all these forecasts, the oil market balance will not be achieved before late in the second half of 2018, as U.S. shale and growing supply from other non-OPEC producers not part of the OPEC-driven pact will offset some of the cartel and allies’ production cuts.

“With that partially offsetting production cuts by OPEC and Russia, the market will have to get confirmation that global inventories will keep coming down,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, told Bloomberg. “If we don’t see that pattern continue then, we could see a significant correction,” McGillian noted.

Outside the OPEC-shale oil supply clash, the return of geopolitical risks to the oil market will be the major driver of potentially higher oil prices this year, analysts reckon.

In the fourth quarter of 2017, supply disruptions in Iraq courtesy of the Kurdistan region’s referendum, as well as from the Saudi political purge, sent oil prices higher.

This year, oil prices made their strongest start to a year since 2014, with both Brent and WTI starting 2018 trade above $60 a barrel for the first time since January 2014.

The oil price rally at the end of 2017 was primarily supported by multiple but temporary supply disruptions, while the latest leg up has been driven by protests across Iran, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Tuesday.

However, the bullish momentum in the second half of 2017 has led to the creation of a record speculative long bet, while it also supported a strong recovery in U.S. production, Hansen said.

“At current crude oil prices it is only a matter of time before the 10 million barrel/day production target will be reached,” Hansen noted, adding that the drop in U.S. inventories—by more than 100 million barrels from the March 2017 record peak—has also supported oil prices.

“Given the impact on the price of oil of a few hundred thousand barrels per day in changed supply or demand we see the risk – especially during the first half of 2018 – skewed to lower prices with Brent crude oil more likely to trade in a $50 to $60 range than $60 to $70,” Hansen said. Related: What’s Behind The Canadian Rig Count Crash

By the end of 2018, Saxo Bank sees Brent at $60 a barrel and WTI three dollars lower at $57 per barrel. Still, the risk of geopolitical concerns is not to be overlooked, according to the bank.

“Renewed geopolitical risks (of which we have had plenty during the second half of 2017) are likely to be the key source of support and one which could upset our call for stable-to-lower prices during 2018,” Hansen said.

While OPEC vs. shale will continue to steer oil prices this year—likely suppressing them below a $60 ceiling—the renewed risk of disruptive geopolitical events could push oil prices much higher than $60.

By Tsvetana Paraskova for Oilprice.com

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