- The Brent crude price has rallied 130% since early 2016, underpinned by strong economic growth and production cuts from OPEC and its allies.
- US crude production — already close to record-highs — is predicted to lift even further in the years ahead given easy access to new supply.
- The Commonwealth Bank sees Brent crude falling to $US53 by the end of 2018.
Even with a recent wobble, crude oil prices have been on a tear in recent years, underpinned by the belief that production cuts from OPEC and its allies, along with firmer global growth, will help to balance the global market.
But a threat to that outlook continues to lurk in the background: US crude production.
As seen in this chart from the Commonwealth Bank, productivity at major oil and gas fields is improving, creating a real risk that the rebalancing of the global crude market may be delayed.
“The US Energy Information Administration (EIA) is forecasting US oil production will lift 13.6% to 10.59 million barrels per day (mb/d) this year, before rising another 5.6% to 11.18mb/d next year,” says Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.
“The increase in output has been helped by the rapid expansion in US oil rigs. US oil rigs are now at the highest level since April 2015, and have surged by around 150% since touching a low in late May 2016.”
Dhar says this means that “stronger US oil production remains the key oversupply risk in the oil market”, especially given the level of potential US production that is currently sitting on the sidelines.
“The EIA reports that drilled but uncompleted (DUC) wells have increased to a multi-year high of 7,609 at the end of January,” Dhar says.
“These DUC wells just require fracking to bring oil to the market. And since these wells require less labour to bring online, they are a source of low cost production.
“If oil rig drilling proves uneconomical, we could see companies look to draw down on their DUC wells, keeping US oil output higher for longer.”
Dhar says this highlights just how resilient US shale oil supply has been despite volatile oil prices and shortages of available workers, creating a headache for both other crude producers and oil bulls alike.
“As much as OPEC are stifling oil supply growth, we see global supply outpacing demand this year,” he says, noting this “largely reflects the speed at which US oil producers are responding to elevated margins”.
“We expect oil prices to continue to drift lower by the end of year.”
Dhar is forecasting that Brent crude — the global benchmark — will fall to $53 a barrel by the December quarter of this year.
Front-month futures currently trade at $62.58 a barrel.