Oil is rebounding from its recent biggest weekly decline in two years, but gains are limited due to concerns over a resurgence in US shale production.
American weekly crude output has topped 10mn bpd for the first time on record, and the US government forecasts it will balloon to 11mn later this year. The US oil rig count has risen by 26, the most in a year, to 791, according to Baker Hughes data.
Such an increase would complicate efforts by the Organisation of Petroleum Exporting Countries and allied producers to prop up crude prices by curtailing supply.
Opec, Russia and other oil producers agreed in November to extend self-imposed limits on output until the end of this year, seeking to counter a glut fed partly by US shale drillers.
With a third of the surplus in global inventories still to be cleared, the oil market isn’t fully re-balanced yet. But Opec and Russia have reaffirmed that they’ll persevere with their 1.8mn bpd oil-production cuts until the end of this year to clear the glut.
The allies have also signalled they’re ready to co-operate beyond 2018. Compliance with the production curbs Opec members have imposed on themselves reached a record 129% in December, an impressive feat for a group that has cheated on quotas in the past.
For sure, Opec, the producers’ alliance formed in 1960, is not what it used to be when it comes to calling the shots in the oil market. But the grouping that pumps 40% of the world’s oil is still in the lead to manage prices.
By keeping the 1.8mn bpd of cuts in place for a further nine months – and beyond if needed – the oil producers aim to return stockpiles to their five-year average without overheating the market and eliciting a new flood of shale oil.
The world’s appetite for oil is seen staying strong, too. Opec’s in-house forecast is that demand for its oil is expected to increase by almost 400,000 bpd in 2018. Longer term, demand is projected to reach 111.1mn bpd by 2040. Opec’s heartland in the Middle East still holds the world’s most profitable fields to pump at about a third of the cost of US shale.
But rising oil prices bring about a catch-22 situation for Opec.
Just as the production cuts, aided by a growing global economy, have helped push up oil prices, the International Energy Agency has warned of “explosive” US output growth this year. Opec, too, boosted its 2018 forecast for rival oil-supply growth by 16%, also cautioning of the effects of a higher price environment. The US shale boom has brought the country closer to energy self-sufficiency than at any time since the 1980s.
There are, of course, gainers and losers from consistently lower oil prices. But the world is in need of a stable oil market with price equilibrium.
For now, the oil market is keeping a close watch on the persistent conundrum: Can Opec maintain prices consistently higher at sustainable levels without stimulating further growth in US shale oil production?
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