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What’s Stopping An Oil Price Rally?

Rig

Oil supply disruptions, high OPEC oil cut deal compliance rates, an extra-violent hurricane season, and the threat of new U.S. sanctions against Iran have fed optimism in oil markets over the past couple of months. Yet there’s bad news for bulls: a growing number of experts and industry insiders warn that the lower-for-longer scenario is nowhere near its end.

Earlier this week, Deloitte Services released a survey of 250 U.S. oil industry executives that revealed two-thirds of them expected oil benchmarks to remain below $60 through 2018. In fact, the majority of executives polled said they didn’t expect crude to rise above $70 before the end of the decade. Also, 60 percent said they expected the number of drilling rigs in the country to decline next year, and half said that capital spending will likely fall in 2018.

The president of Facts Global Energy consultancy shared a similar message Wednesday. Speaking at the Reuters Global Commodities Summit, Jeff Brown said that global inventories were still quite high, and there was no meaningful reason for them to decline by any significant amount over the next year or two. This means there is no big upward driver for oil prices.

In its latest Oil Market Report, the International Energy Agency also displays cautious optimism. OECD crude oil inventories are still 170 million barrels above the five-year average, which OPEC took as its target in the production cut deal. Although it’s a substantial reduction from the 318-million-barrel overhang at the start of 2017, there’s still excess oil in the world—and it will weigh on any possible price increase in the short term. Related: The New Challenger To Lithium Batteries

Of course, forecasts of growing U.S. production apply their own pressure on oil prices, and for the time being, forecasters seem to be in agreement that U.S. oil production will indeed continue to grow even if industry executives expect to see fewer rigs. The technology-enabled efficiency improvement drive in the shale patch is still gaining momentum, after all, and it’s only reasonable to expect more news in this area, particularly about further cost-cutting and lower breakeven prices.

Separately, efficiency, in a wider sense, also undermines the prospects of a rosy future for oil prices. Efficiency and technology are the twin factors that consistently push down oil demand, but oil bulls seem to ignore them, the chief economist of asset management firm Tressis Gestion told CNBC recently.

"The bulls of the oil market are missing the elephant in the room, which is efficiency and technology. It takes away every year—no matter what they say—it takes away estimates of growth of demand in the region of around 500,000 to 600,000 barrels per day," Chief Economist for Tressis Gestion Danielle Lacalle said. Related: IEA: Oil Prices To Hit A Ceiling In 2018

To top it all, last month OPEC exceeded its own stated production target, pumping 32.75 million bpd—25,000 bpd above its quota—mostly because of production increases in exempt Libya and Nigeria, but also because Iraq pumped more as well.

So, we have growing U.S. production, regardless of where prices are going. We have OPEC struggling to maintain compliance, and possibly doomed to make the production cut deal indefinite since every higher figure reported pushes benchmark prices down immediately. And we have general tech-enabled efficiency driving down demand, despite relatively optimistic global oil demand forecasts from various authorities.

There really isn’t much to support the argument for prices climbing significantly higher for the time being, except perhaps new U.S. sanctions against Iran. That event would tip the scales in a more favorable direction for prices, and this fact could just make the sanctions more likely.

By Irina Slav for Oilprice.com

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