• 4 minutes Is The Three Gorges Dam on the Brink of Collapse?
  • 8 minutes The Coal Industry May Never Recover From The Pandemic
  • 11 minutes China Raids Bank and Investor Accounts
  • 2 hours During March, April, May the states with the highest infections/deaths were NY, NJ, Ma. . . . . Today (June) the three have the best numbers. How ? Herd immunity ?
  • 5 hours In a Nutshell...
  • 16 hours Is OilPrice a cover for Green Propganda
  • 1 day Putin Paid Militants to Kill US Troops
  • 20 hours Victor Davis Hansen on Biden's mental acuity " . . unfit to serve". With 1 out of 5 Democrats admitting it. How many Dem's believe it but will not admit it?
  • 2 hours Putin Forever: Russians Given Money As Vote That Could Extend Putin's Rule Draws To A Close
  • 18 hours Tesla Model 3 police cars pay for themselves faster than expected, says police chief
  • 2 days Biden admits he has been tested for Cognitive Decline several times. Didn't show any proof of test results.
  • 2 hours Apology Accepted!
  • 4 hours Happy 4th of July!
  • 1 day The Political Genius of Donald Trump
  • 2 days Why Oil could hit $100
  • 2 days Per most popular Indian websites it was Indian troops not Chinese troops breach of LAC that caused the clashes. If you know any Indian media that claim to the contrary please provide the link
Oil Prices Remain Excessively Vulnerable To Shocks

Oil Prices Remain Excessively Vulnerable To Shocks

Oil markets remain highly fickle,…

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. 

More Info

Premium Content

Rising Supply Will Keep Oil Prices Rangebound

Rising oil production from various parts of the globe could keep oil prices “range-bound” for the rest of this year.

During the second quarter, fears of supply shortages began to mount, as OPEC disruptions combined with strong demand and shrinking inventories to push prices up significantly.

More recently, concerns have focused on weak demand, driven by a strong dollar, cracks in emerging markets (punctuated by the currency crisis in Turkey), and a weakening macroeconomic picture globally.

But additional bearish concerns could soon come from the supply side, a notable turnaround as the supply picture has been a bullish factor for much of this year. Market analysts grew concerned about a supply crunch a few months ago, but the outlook is now shaping up to be one of, if not abundance, then maybe “adequate” supply.

Supply outages from non-OPEC countries are actually at a 15-month high right now at 730,000 bpd. However, much of that will be resolved soon with Canada’s Syncrude facility bringing production back online. Also, a new agreement between Sudan and South Sudan could see higher output levels there, according to Bank of America Merrill Lynch (BofAML). Meanwhile, production increases are expected in Canada, Brazil and the U.S., the three countries that continue to drive up output outside of OPEC. Altogether, the production increases will add new supply in the second half of 2018, “taming upside pressures on Brent crude oil prices,” BofAML wrote in a note.

The shale industry could face some infrastructure headwinds in the Permian, but so far that has not made a huge dent in production forecasts. In fact, U.S. shale companies are increasing spending this year. According to Rystad Energy, in the second quarter, a selection of 33 shale companies announced spending increases of a combined 8 percent relative to initial spending guidance, an additional $3.7 billion in spending. Related: Could Tesla Thrive, Or Even Survive, Without Elon Musk?

As a result, despite the pipeline bottlenecks, BofAML believes the U.S. could add 750,000 bpd between the second and fourth quarters of this year, a massive increase. “This increase, coupled with returning oil sands output and refinery maintenance should weigh on domestic pricing and structure later this year and next, eventually moderating US oil output growth,” BofAML analysts wrote in a note.

Adding to the supply picture is an improving decline rate at existing oil fields. Several aging oil basins saw steep decline rates during the market downturn between 2014 and 2017, such as oil-producing regions in Brazil (Campos Basin), Mexico (Abkatun and Cantarell), Russia, the U.S. and the North Sea.

“Yet, we now see non-OPEC production decline rates at aging oil fields moderating on higher prices,” BofAML argued. Oil companies have more money to keep up existing fields, maintaining them to avoid sharp declines in output, while also keeping marginal fields online. Non-OPEC production decline rates dipped in 2017 to 5.2 percent on average, down from 5.4 percent prior.

Higher oil prices this year could slow the decline rate by even more. BofAML cited China as evidence, where year-on-year decline rates narrowed to just 2 percent in July, down from 3.6 percent in 2017 and a whopping 6.9 percent in 2016.

Still, decline rates in the U.S. and Russia matter the most, since they are the two largest oil producers. And there, the recent uptick in oil prices (driven to a record high in ruble terms) and higher spending from U.S. shale should translate into lower decline rates compared to the last few years. Related: The Bullish Case For Gas In Europe

Combined with new output, the oil market may not be in as much of a pinch as many previously thought.

To top it off, the U.S. just announced a sale of 11 million barrels from its strategic petroleum reserve (SPR) that will take place in October and November, not coincidentally timed for when U.S. sanctions on Iran take effect. The sale will add the equivalent of 120,000 bpd in the fourth quarter, somewhat offsetting the impact of lost Iranian supply, BofAML argues.

In short, the supply picture looks less dire than it did a few months ago. That is likely why Saudi Arabia actually cut output in July compared to June, a move that caught the market by surprise. Saudi officials suggested the decision was made because demand was not as strong as expected.

There is plenty of additional supply coming online for the remainder of this year, which should limit the upside for oil prices. The sanctions on Iran, which could take 1 mb/d of supply offline, or perhaps more, should limit the downside.

All of that suggests that oil prices will remain “range-bound” in the near term, as BofAML put it.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Aghast on August 29 2018 said:
    The world economy is being restructured and as a result of the refiguring the demand for oil will be far higher in the future than currently expected.

    Plan accordingly.

Leave a comment




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