- Both the number of US oil rigs and undrilled wells are at multi-year highs.
- But CBA analyst Vivek Dhar says limited pipeline infrastructure will continue to constrain US supply.
A common point of discussion in oil markets is that as prices rise, more US shale oil producers will be attracted back into the market.
There was more bullish price action in oil markets overnight, as benchmark crude oil briefly climbed above $US80 a barrel for the first time since 2014.
In a research note this morning, Commonwealth Bank’s Vivek Dhar said US production remains “the key oversupply risk” in oil markets.
The US Energy Information Agency (EIA) is forecasting a 14.6% rise in US production this year, followed by a 10.6% rise in 2019. That will leave total US production at 11.86 million barrels per day (bpd).
And it’s being driven in part by a rapid expansion in US oil rigs.
After bottoming out in May 2016 after oil prices had fallen below $US30 a barrel, the number of US oil rigs has almost tripled.
But according to Dhar, there’s a key roadblock when it comes to US oil supply: infrastructure constraints.
He highlighted the contrasting out between financial analysts and participants who are involved on the ground — the producers, refiners and oil services companies.
“While financial players and analysts see US supply growth of 1.3 — 1.6 million bpd in 2018, physical market participants see growth of 0.91 — 1.1 bpd,” Dhar said.
That amounts to a difference of around 30% — a pretty sharp divergence when it comes to the outlook for oil supply.
Dhar said most of that difference is accounted for by a lack of pipeline infrastructure surrounding the Permian basin in west Texas.
“The Permian basin is the largest shale oil basin in the US, and infrastructure constraints could start weighing on Permian supply growth from August,” Dhar said.
Dhar added that in addition to more oil rigs, the number of US oil wells (drilled but uncompleted) rose to a multi-year high at the end of April.
And one aspect of fracking technology in the US is that oil wells are less capital intensive to bring into production than conventional drilling operations or offshore rigs.
But due to the limits of the surrounding infrastructure, Dhar’s analysis suggests that an increase in US production won’t necessarily slow oil’s upward trajectory.