An oversupplied market pushed oil prices below $30 per barrel in early 2016. “But there will be a reaction in USA shale, and OPEC’s strategy will backfire massively”. EIA estimates that, absent significant pipeline constraints, moving crude oil from Cushing, Oklahoma, to the U.S. Gulf Coast typically costs about .50/b.
“We expect oil demand growth to outpace non-OPEC supply growth in both 2018 and 2019”, Standard Chartered analysts said in a note.
Conditions supporting the prices are also wreaking havoc in the supertanker industry, according to experts.
At the same time, oil market observers are looking this week to see whether President Donald Trump extends US sanctions relief to Iran as part of the 2015 global agreement to curb the Islamic Republic’s nuclear program. President Trump faces several Iran-deal-related deadlines in coming weeks.
Both countries were exempt from cuts a year ago but are now expected to join the effort with a combined limit of 2.8 MMbpd.
The senior OPEC source said that the oil market was on its way to being re-balanced, but so far global oil inventories remained above their five-year average and much more time was needed to drain the oil glut.
Another way the cuts could end earlier is OPEC members repeating history and starting to cheat, with Iraq given as an example of a possible early dissenter. “This growth is heavily front-loaded, as drillers seek out and aggressively produce barrels from sweet spots in the Permian and other basins”, OPEC wrote, referencing drilling activity in Texas and New Mexico.
Yet, the demand was the story that has not been told enough.
Oil prices rose on Monday, coming close to three-year highs on a slight decline in the number of US rigs drilling for new production and sustained OPEC output cuts.
Libyan oil production rose to about 1 million barrels a day from 950,000 following a disruption, according to a person familiar with the situation. Anadarko Petroleum, for example, only needs oil to average $50 a barrel to fuel its 2018 plan, and it could trim some spending if crude fell to $45 and still stay on track. OPEC, however, now expects excess global inventories to arrive “at a balanced market by late 2018”. After the main fields and oil export terminals in Libya re-opened in 2017, production started to increase and, together with Nigeria’s recovering oil production and US shale resurgence, was offsetting part of the OPEC cuts and depressed fuel prices for much of 2017.
The drop in Venezuela’s oil output due to its existing crisis has been the biggest reason for the improvement in compliance. Some analysts, however, warn that markets might be overheating. On Nov. 28, 2014, the day after Thanksgiving, Brent crude was trading at $70.15 per barrel and WTI closed at $66.15. “When these factors disappear, oil will go down to the bottom of the corridor to $65-70 per barrel”, the expert expects, adding that the general trend will hold prices in this corridor for the next two months, after which we can expect fluctuations in the range of $70-75 per barrel.