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    Oil Market to Balance at Around $55-60/Bbl as Deeper OPEC Output Cuts Expected

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    Despite the rise in US shale oil production, the expected extension of the OPEC oil extraction caps will provide a moderate support to global oil prices in the near-term, with boom or bust scenarios almost ruled out as the global energy market balances gradually.

    Kristian Rouz – OPEC member-states and other oil-producing nations are meeting on May 25 to discuss, among other things, the extension and deepening of oil extraction caps in order to support crude prices and ease the supply-side glut issue.

    An oversupply of oil has been affecting the global oil producers since the second half of 2014, when US shale production skyrocketed, proving disruptive to the existing structure of global oil trading.

    Even though, according to the Saudi Energy Minister Khalid Al-Falih, all oil producers have agreed to extend oil caps by nine months, also possibly decreasing the current levels of extraction, global oil prices are not expected to post a significant rally in the near-term. The main reason is that the OPEC and non-OPEC oil cuts might be effectively offset by an increase in US shale oil production.

    Last year, the US lifted a 40-year oil export embargo, and this February, the US shipped record-high volumes of crude overseas. While OPEC oil cuts have resulted in a decrease in the global market share occupied by members of the energy cartel (most notably Saudi Arabia), US oil started to fill this niche.

    Does this mean the resurgence of US shale oil production after two years of desolation will result in another crude price bust, similar to the one seen in late 2014? It does not: this time around, the market structure is different.

    The US remains one of the world’s major oil consumers, and the total volume of US oil consumption still exceeds any projected level of oil extraction in North America. In 2016, the US consumed an average of 19.63 mln bpd, and the demand has increased this year, as suggested by recent declines in US crude stockpiles. At this point, however, US oil production stands at 9.1 mln bpd.

    Moreover, with the construction of the Dakota Access Pipeline (DAPL) and Keystone XL, the lion’s share of US shale oil will flow to the refineries of the Gulf Coast, most notably, in Louisiana and Texas. US East Coast refiners and consumers, therefore, will be increasingly reliant on crude imports.

    "It should be somewhat supportive of (US oil prices) in the short run, particularly if the exports keep up. But it obviously is a challenge for the global market and a renewed threat to OPEC and their designs of keeping prices up," John Kilduff of Again Capital said.

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    The US and world crude prices are heading for parity, and in the medium-term, US oil prices are projected to outpace the price of the London-traded global Brent benchmark. This is partially because many US crude producers will find it more profitable to export their oil rather than selling it in the domestic market, especially after the Trump administration cuts US export customs tariffs.

    Even though at this point the US crude production might be holding back the gains in global oil prices resulting from the OPEC extraction cuts, in the medium-term, global oil prices are likely to settle at higher levels than they are now.

    Meanwhile, OPEC and other major oil producers are eyeing extending oil production caps till the first quarter of 2018. The decision is expected to be made during the OPEC meeting in Vienna on May 25.

    “We think we have everybody on board,” Al-Falih said. “Everybody I’ve talked to indicated that nine months was a wise decision.”

    Subsequently, oil prices advanced to a one-month high on the news, with Brent benchmark having gained 2.1 percent to $53.61/bbl, and US oil appreciating to $50.33/bbl. In the near-term, global oil prices are set to advance to $55-60/bbl, even though US shale production has increased by 10 percent since mid-2016, mainly because the global demand for fuel has also picked up in line with more robust economic growth in the advanced and developing economies alike.

    “OECD and non-OECD floating storage has been offloaded into tanks and consumed. We’re coming into high demand season, so I think everything is coming together with a consensus among producers, demand rising, and the global economy doing well; Japan, Europe and the US are all doing reasonably well economically. So we’re fairly optimistic,” Al-Falih said.

    Considering all the factors that drive the global oil market, US oil prices are likely to post more significant increases compared to gains in the Brent benchmark price. The extension and possible deepening of OPEC production cuts might not produce a massive oil rally, as the market will be levelled off by the US exports, but stronger global demand will contribute to easing the oil supply glut, with oil prices stabilizing at 5-10 percent higher than their present level.


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    oil output cuts, oil, oil output, Shale oil, oil prices, OPEC, United States
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