Bearish outlook for oil prices as US production set to surpass 10m barrels daily
The US Department of Energy Information Administration (US EIA) last week signaled it is now more confident that US oil production will rise to 10 million barrels a day next year, the highest average annual level ever recorded.
Oil markets would need to brace for a long bearish market as this forecast expected to materialise in 2018 puts US production closely behind Saudi Arabia and has capacity to worsen inventory build concern.
The department’s Energy Information Administration forecast output would surge to the historic level higher than a previous record average of around 9.6 million barrels a day in 1970.
To worsen matters further, the EIA said that it expects relatively unimpressive drawdowns in inventories in 2017, projecting declines of just 0.2 mb/d worldwide in 2017. And in what should be very worrying for OPEC and other oil bulls, the EIA also sees inventories rising again in 2018 by 0.1 mb/d
The Paris-based think tank, revised down its outlook for prices in 2018 last week, raising the prospect that US oil producers might have to live with thinner profit margins next year.
The agency now forecasts that the US West Texas Intermediate crude averaging $53.61 a barrel next year, down 2.7 percent from a forecast of $55.10 in last month’s short-term energy outlook. It also revised down its price expectation for international benchmark Brent crude by 2.6 percent.
The EIA left its forecast for this year’s production unchanged at 9.3 million barrels a day. It slightly upped its outlook for average WTI and Brent prices in 2017 by about 10 cents.
However, increased production has grave implications. A glut in oil markets last saw oil prices fall to 10-year lows of below $30 per barrel and saw oil the club of oil producers under OPEC scurry to cut back production to shore up oil prices.
Shale producers, currently ramping production seem to spare little thought for an OPEC agreement as “increased drilling activity in US tight oil basins, especially those located in Texas, is the main contributor to oil production growth, as the total number of active rigs drilling for oil in the United States has more than doubled over the past 12 months,” EIA acting Administrator Howard Gruenspecht said in a statement.
Analysts say output in the American oil patch has ramped up to about 9 percent to 9.3 million barrels over the last eight months. After a nearly three-year downturn, American oil companies have cut down the cost of advanced drilling methods, breakeven margins look more favourable with increased technology and favourable policy allowing them to produce profitably.
Already oil prices have plunged back to the mid-$40s, about the same levels when OPEC members agreed to cut 1.8 million barrels per day in November. A meeting in May this year agreed to deepen the cuts till March 2018, failed to lift oil prices because markets were anticipating deeper cuts.
US shale production has not relented but continues to rise, inventories remain high and OPEC members like Nigeria and Libya, whose production have been impacted by internal crises in the their countries, are now back raising fears that a glut may soon set in and bearish prices may remain far longer than anticipated.
ISAAC ANYAOGU