While the bulls remain in charge of oil market sentiment, reality is not far away as US production continues to rise in response to the surge in prices.
Global prices jumped round 17% in 2017, thanks to a rise of the same dimensions in the final three months of the year and have continued to rise early in 2018, until last week when they suffered their biggest drop for a month or more.
That was after prices hit new three year plus highs with Brent crude topping $US70 a barrel for the first time since late 2014.
Oil prices finished lower Friday night on worries over growing rising US oil production.
February West Texas Intermediate (WTI) oil futures lost 58 cents, or 0.9%, to settle at $US63.37 a barrel in New York. The February contract expires at tonight’s settlement.
In London, Brent crude for March delivery – the global oil benchmark, fell 70 cents, or 1%, to end at $US68.61 a barrel.
For the week, WTI crude fell roughly 1.5%, the largest drop since early December, while Brent was down about 1.8%—its largest weekly fall since early October, according to data group, FactSet.
Friday’s fall came despite Baker Hughes weekly survey of oil rig use revealing a small fall in the number of US oil rigs in use – down five to 747 this week, although that followed a rise of 10 rigs a week earlier. The total active US rig count, which includes oil and natural-gas rigs, dropped by 3 to 936, according to Baker Hughes.
But as futures prices were hitting three year and more highs midweek, the International Energy Agency (IEA) joined the US Energy Information Administration (IEA) and OPEC in reminding traders and others that the spectre of rising American production will be around for years.
In fact the IEA went further than the other two groups and forecast that it sees US crude oil production this year surpassing output in Saudi Arabia and rivalling that of Russia, the world’s two largest oil producers.
Boosted by the resurgent shale industry, the IEA says US crude production will likely climb above 10 million barrels a day in 2018, a level not seen since 1970.
In its monthly report the IEA raised its outlook for US crude supply this year by 260,000 barrels a day, to a record 10.4 million barrels a day, largely a result of the recent rally in crude prices.
“The stage was set for a strong expansion last year when non-OPEC supply, led by the U.S…pushed up world production,” offsetting output cuts by the Organization of the Petroleum Exporting Countries and other producers, the IEA said.
OPEC and 10 producers outside the cartel, including Russia—which produced around 10.9 million barrels a day in 2017—agreed late last year to extend an agreement to hold back crude output by nearly 2% through the end of 2018.
The accord was first struck at the end of 2016 with the aim of reining in a global supply glut that has weighed on prices for over three years. The OPEC production cap which is still being adhered to by those in the agreement, including non-member Russia has worked to boost prices. Rising demand from the rebounding global economy is also playing an increasing part, as the latest monthly update from OPEC last week also confirmed.
But lurking in the background is rising non-OPEC production – which was acknowledged last week by the producer group.
Opec said oil production growth from outside of the cartel in 2018 will be higher than it had previously anticipated, as the group revised up demand estimates for its own crude.
Non-Opec supply is expected to expand by almost 1.2 million barrels a day (m b/d) this year, a 160,000 b/d upward revision, Opec said in its latest monthly market report.
Opec expects demand for its crude to stand at this year, at 33.1 m b/d — a figure that was downwardly revised from the prior month’s report.
Global oil demand growth is forecast to stand at just above 1.5 m b/d, a slight upward adjustment compared to last month’s report. OPEC said its December oil production rose by 42,000 barrels a day to 32.42 million. It also lifted its 2017 global demand estimate to 96.99 million barrels a day and forecast 2018 demand at 98.51 million barrels a day.
The group said this was “driven by mostly higher growth expectations for the US and Canada,” and “Higher oil prices are bringing more supply to the market, particularly in North America and specifically tight oil,” OPEC acknowledged.
OPEC’s report follows a forecast from the US Energy Information Administration last that it expects US oil output to continue to rise in February with production from shale increasing by 111,000 b/d.
The agency previously said US output could reach 10 million b/d in February and 11 million b/d by late 2019.
OPEC’s warning and higher output estimates for non-members underlines the continuing report fears by big producer nations that the current rebound in prices — which — could trigger a flood of new US supply, undermining efforts by global producers to curb output.
OPEC made the additional point that US shale oil companies have managed to lower their break-even costs by up to 50% since oil prices crashed in mid to late 2014 “by improving technology and efficiency.”
Total non-Opec supply is forecast at 58.8 million b/d this year.
U.S. crude inventories fell 6.9 million barrels last week, compared with forecasts for a 3.5 million-barrel draw, the US Energy Information Administration said. Crude supplies at the Cushing, Oklahoma delivery hub for U.S. crude futures fell 4.2 million barrels in the week, the largest draw since at least 2004.
After falling the previous week due to cold weather, US crude production rose to 9.75 million barrels day last week.
