At $50, and even more so at $60, U.S. oil drillers can profit on a much wider group of drilling sites. Analysts say a new deal expected from OPEC and other producers could speed up a re-balancing of the market, but the wave of new U.S. shale wells would also unleash enough new oil to cap OPEC’s price gains.
Energy ministers from Russia and Saudi Arabia this week said they would recommend that other producers agree to an extended nine-month deal, instead of the six months or less that was expected by markets. The producers have agreed to hold 1.8 million barrels a day off the market. Oil jumped on the news, with West Texas Intermediate crude edging back toward the psychological $50 per barrel level Tuesday and Brent futures just over $52.
Many analysts expect to see $60 oil by the end of the year, but he gains are not expected to spike much higher.
“Basically U.S. supply is coming on faster than we anticipated. Now you have a higher inventory
Blanch said he expects Brent, the international bench mark to average $54 per barrel this year from an average $61 per barrel. He recently cut his forecast. For 2018, he does not see much of an increase, and he sees Brent at $56 per barrel, versus his previous forecast of an average $65.
Ed Morse, Citigroup’s global head of commodities research, said he sees a strong chance of OPEC and the other producers unveiling a plan to cut production even deeper than the current 1.8 million barrels a day. He said the fact they signaled a longer time frame for the production deal suggests they could be discussing a bigger cut, and he sees a
“I think this market will re-balance itself very quickly. The extension alone should result in deeper cuts,” he said. Morse said the market will see deeper cuts as an “invitation for cheating” and “a sign of desperation.” Morse said the re-balancing is already underway, but he may have cut his price forecast if it were not for the fact that he expects the production cuts to be deeper.
Blanch said he doesn’t expect Russia or OPEC producers to cut back more. “I think it’s pretty risky to deepen the cuts when they’ll be losing market share to shale,” he said. The U.S. is the world’s
“It feels to me that Saudi, Russia, and even the U.S., everyone needs $60 oil. The problem is you can’t have the quantities and the prices,” he said.
Morse said he expects Brent prices could reach $65 per barrel in the fourth quarter, and WTI somewhat less at $62 but he does not expect high prices to hold, and the could be averaging in the $50s in the second half of 2018.
“We don’t think U.S. production is going to stop the re-balancing of the market this year,” he said, adding he expects U.S. production to grow by 800,000 barrels a day this year. “It’s not enough to counter the cuts that are in place, particularly if they’re being extended.”
“We think next year will be more problematic,” he said. He expects shale drilling to accelerate and U.S. shale alone could meet the new demand in global growth.
Even with the recent dip in oil prices, U.S. drillers have been adding wells. Nine were added for the week ending May 12, bringing the total count up to 712,
IHS Markit expects U.S. shale to grow by 900,000 barrels a day this year, and by the end of this year or early next
“You can certainly say a lot of
Yergin said shale is now medium cost production, versus high cost as recently as 2014.
The Permian in West Texas is currently most active, but more drilling could open up Eagle Ford in Texas or Bakken in North Dakota as prices rise.
“Other plays still remain on the sidelines in this $50 environment. When we were growing at a million barrels in the U.S., it wasn’t Permian. It was Bakken and Eagle Ford,” said Helima Croft, head of global commodities strategy at RBC. “The other thing about shale is it has a very high decline rate. The shale did come back stronger. Rigs are returning and for
Analysts have expected the market to get a lift from the summer driving season, and so far U.S. gasoline demand has been softer than expected. However, that could change and the market should see higher prices this
“We expected big stock draw downs in the second half and we still expected big stock draws in the second half,” said Michael Wittner, global head of oil research at Societe Generale. “We think we get to around $60 [WTI] in the fourth quarter…There may be a little downside on the fact that draws are happening more slowly than we thought.”
He said U.S. shale’s response is something that Russia and Saudi Arabia have considered when working out a new deal. “It’s something they’ve been thinking about – these two countries, and others – all along. They knew they needed to support prices but then the U.S. producers would see that and there would be an investment and supply response. The bottom line – these two countries are acting in their own self-interest. Their own