Oil prices are at a three-year high above $US70 a barrel, but Commonwealth Bank’s commodities team expects increased supply to weigh on prices later this year.
Last week, the bank forecast prices to fall to $US53 a barrel by Q4 2018 as US shale oil producers take advantage of increased margins.
And the latest US oil rig data shows US production levels remain elevated near recent highs.
“Rigs deployed in US oil plays rose from 747 to 759 last week, the largest increase in 10 months,” Commonwealth Bank said.
“Oil rigs are increasing on the back of rising oil prices, which are hovering at 3-year highs. US oil rigs are now only 9 rigs below highs touched last August.”
And CBA says there’s significantly more production still in the pipeline.
“US oil rig contractor Helmerich expects oil rigs to increase by 100 to 200 rigs this year due to increasing oil prices,” the bank said.
An increase of 200 rigs would take the overall rig count to just under 1,000 — the highest level since 2011.
“Supply growth is expected to be spearheaded by US producers, which should continue to lead oil rigs higher,” the analysts said.
Oil’s recent price gains — initially driven by OPEC’s decision to extend production cuts to the end of this year — have received a further boost from weakness in the US dollar.
But as prices rise, so do production margins — which makes it more economically viable for US companies to ramp up their drilling efforts.
The CBA analysts said that with prices at these levels, it alleviates the pressure on US producers from rising wage costs stemming from tightness in the labour market for oil services.
They cited the US Energy Information Administration (EIA), which expects production to average 10.51 million barrels per day (bpd) in Q4 2018 — a rise of around 0.6 million bpd from current levels.
“These forecasts likely face upside risks if current oil prices persist,” the analysts said.
“Another major source of US oil supply includes a backlog of oil wells to be completed. The EIA reported that drilled-but-uncompleted (DUC) wells have increased to a multi-year high of 7,493 at the end of December.”
Wells which have already been drilled require less labour-intensive work to bring the oil to market, which will further reduce costs.
In CBA’s view, the net effect of the increased activity in the US is that global supply is likely to outpace demand this year, despite increasing evidence of a global economic upswing.
“Demand is set to grow strongly again this year on the back of OECD consumption growth,” CBA said.
“The larger risk at play though is that current oil prices may encourage more supply and discourage consumption.”
The bank’s analysts are maintaining their view that oil prices will fall to the low-$US50 a barrel range by the end of the year — a decline of more than 20% from current prices.