After years of price declines, crude oil prices enjoyed a stellar 2016, surging by over 100% from the lows struck in mid-January.
OPEC’s decision to cut crude output on the first half of 2017 — announced in late November — along with a decline in US crude production as a result of previous price declines, proved to be a powerful combination, putting a rocket under prices.
As shown in the chart below from the Commonwealth Bank, US crude oil inventories also fell back from record-highs struck earlier in the year, largely as a result of reduced US production.
In terms of day supply, they now sit around the same levels seen at the start of last year.
However, having largely been unchanged compared to the levels of a year earlier in recent months, Vivek Dhar, mining and energy analyst at the Commonwealth Bank, believes that the trend is increasingly looking under threat, suggesting that recent strength in crude prices risks bringing even more US crude production back online.
“The agreement among OPEC and non-OPEC producers at the end of last year to cut 1.8mb/d [million barrels per day] of global output in 1H17 will have ramifications for US oil producers,” he says.
“US data suggests that oil prices around $US50 per barrel are encouraging the restart of idled US shale oil output.”
Dhar believes that if OPEC’s output cuts push oil prices to around $US55 per barrel — where they currently sit — a potential supply boost from US shale oil producers may undo OPEC’s desire for higher prices.
There are already signs that this is occurring with US oil production lifting to 8.95mb/d last week, leaving it only 0.66mb/d below the peaks reached in June 2015.
That corresponded with a lift in US crude stockpiles of 4.1mmbbl [million barrels] to 483mmbbl over the same period.
In its latest short-term energy outlook, the US Energy Information Agency (EIA) forecast that US oil production would average around 9.0 mb/d in 2017, just fractionally above where it already sits.
And that’s with oil rig numbers continuing to increase.
Given signs that a US supply response to higher prices is already underway, Dhar says that he expects oil prices to average between $US50- 60 per barrel in 2017.
Front-month Brent crude futures — the global benchmark — currently trade at $US55.10 per barrel.