Oil rises, but growing USA output threatens rally

“If, on the other hand, bulls lose their strength and light sweet crude oil drops back below $52.68/b, the lower rising trend-line will be tested”.

After a brief profit on Monday, crude oil prices regained strength and rose in the early hours on February 21.

But what parts of the world can grow output in the years ahead? The US producers export the higher quality oil and import what they need from overseas.

The revived possibility of a USA rate hike next month, together with demand for risky assets, weakened gold prices.

Hedge funds hold more than 9.5 long positions for every 1 short position in Brent and WTI combined, the highest ratio since May 2014 (http://tmsnrt.rs/2ldKiTX).

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We estimate that USA shale production will decline annually by 270 thousand b/d, on average, until 2022 in a $40/bbl WTI environment. If maintained it would nearly neutralize the cuts seen from Opec so the coming reports will be watched closely to see it this was a one off or a new trend.

OPEC may decide to extend the output-cut deal or induce higher cuts from July if the oil prices fail to revive as expected. Meanwhile, countries such as Mexico and the United Kingdom will keep facing output declines. Outside the GCC, production capacity and output has stagnated or fallen in Algeria, Egypt and Libya, mainly due to the political problems in those states. This equates to 830 thousand b/d of annual average growth in the next five years, or around the 20-year average of 790 thousand b/d (Chart 3).

By 2016, with oil prices at historic lows, Saudi Arabia and OPEC gave up.

Domestic refineries processed 2.155 million bpd, down from 2.184 million bpd in November. American oil production fell 12% in just over a year.

John England, US energy and resources leader and US and Americas oil and gas leader at Deloitte, said the survival mentality in the oil and gas industry seems to have resulted in a mindset shift toward shorter-cycle projects.

The Organisation of the Petroleum Exporting Countries and other producers, including Russian Federation, agreed past year to cut output by nearly 1.8 million bpd during the first half of 2017.

Because Saudi Arabia has such vast oil reserves – roughly seven times the amount of American reserves – they could produce enough oil to change its price. That was the first time Russian Federation beat Saudi Arabia since March. It then got support from non-member nations, most notably Russian Federation, that meant total planned curbs of about 1.8 million barrels daily.

The official also announced that the country’s Sixth National Development Plan (2016-2021) has envisaged daily oil production of 4.7 million barrels. “What we do see is more risk of higher production in the USA, we see a rise in inventories”. The last time OPEC succeeded in getting producers to agree to a production cut in 2008, the Brent crude rose from slightly above $30 per barrel to $50 per barrel.