Comments from Davos Paint Bleak Picture for Oil Price Hopes – 1/19/17

Among oil industry experts and officials in Davos, Switzerland, pervasive skepticism about the effectiveness of the OPEC deal in rising oil prices. At the front of everyone’s mind: the rising output from U.S. shale oil rigs.

Oil-price gains will trigger a “significant” increase in U.S. shale output as OPEC and other producers rein in supply, according to the head of the International Energy Agency (IEA).

At $56 to $57 a barrel, “a lot of shale plays in the United States would make perfect sense to produce” Executive Director Fatih Birol said in a Bloomberg TV interview in Davos. “I expect U.S. production will start to increase again… as a result of the higher prices,” Birol said. “Prices will go up, U.S. and other production will go up and put downward pressure on prices again. And up and down. We are entering a period of greater oil-price volatility.”

Birol’s comments suggest that the IEA has become more optimistic about the outlook for U.S. production. Previously, the agency said it expected U.S. tight oil — as shale is also known — to rise only “marginally” in 2017.

Oil prices have risen about 20% since the Organization of Petroleum Exporting Countries (OPEC) reached a deal to curtail supply last year. The November agreement prompted a surge in activity in the U.S..

While oil prices have increased more than 20% since OPEC decided to cut production to boost prices, it has also helped bring back more shale drillers who caused prices to drop in the first place due to oversupply in the market.

“This means that while 2017 is starting out very bullish for oil, it may not end that way,” said Bjarne Schieldrop, chief commodities analyst at SEB AB bank. “Physical delivery of oil will force the price back down again in the second half of this year.”

Production in the U.S. has increased by about 460,000 barrels a day, or 5.4%, in the past six months. In response, the EIA recently raised its domestic output forecast for 2017 to 9 million barrels a day from 8.78 million projected in December. Output is projected to increase to 9.3 million barrels a day for 2018.

“The U.S. oil producers, and Canadian producers and all over the world are adapting to doing better in a lower price environment and that has created a resiliency that we haven’t seen,” Kenneth Hersh, chairman of NGP Energy Capital Management, said in Davos. “U.S. unconventional has increased about half a million barrels on a $50 base, whereas two years ago it was unthinkable oil production in the U.S. would increase at $50.”

The consistent belief that U.S. shale will keep prices low is bad news for OPEC members and non-members who agreed to cut production to re-balance markets, likely at the expense of their own market share.

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