Oil Price Sits in a Precarious Temporary State of Balance After Strong Rises

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Oil prices have rallied this quarter, with Brent crude hitting a peak of U.S. $67.50/barrel, according to oil-price.com.

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Goldman Sachs is quoted in a note to investors as saying the resilient demand growth and supply outages could push prices up to U.S. $70/barrel in the near future.

Against a landscape of supply disruption, the surprise has been strong demand growth.

January saw demand increase by 1.55 million barrels per day year on year. Demand in China, in particular, is stronger than expected, the article noted. Despite subdued global GDP growth, consumers still see the outlook as positive — so, combined with comparatively low gasoline prices, consumption has remained robust.

On the supply side, OPEC and its non-member partners have done a remarkably good job of constraining excess supply. Following an agreement in October to trim production levels by 800,000 barrels a day through June 2019 — supported by Russia and other non-OPEC members matching a further 400,000 barrels a day — producers have managed to achieve most of the 1.2 million barrels of intended cuts.

Compliance has been high, too. MarketWatch reported the 11 OPEC members achieved 79% of their committed cuts in February, according to data from S&P Global Platts — an improvement from 76% a month earlier.

The Joint Ministerial Monitoring Committee, a production policy monitoring group, quoted even higher overall conformity with the production cut agreement last week, saying OPEC in February achieved almost 90% of its 1.2 million barrel daily reduction target. Sanctions against Iran and Venezuela have also made a significant dent to supplies, further squeezing the market.

The 800-pound gorilla is U.S. shale.

According to the Energy Information Administration (EIA), shale is expected to rise further in April, with the seven largest U.S. shale producers pumping 8.592 million barrels a day.

It is the potential for U.S. shale to more than make up for supply-side tightness elsewhere that is probably capping Goldman Sachs’ predictions of price rises beyond $70 a barrel.

MarketWatch quoted Baker Hughes, which reported active rig counts fell for a fourth straight week, suggesting output growth may be stalling — at least for the time being.

Crude price rises may stimulate more drilling if the price remains elevated; too much of a surge, however, will be self-defeating if inventories rise and the price subsequently falls.

The market, therefore, is in a delicate balance.

There is little OPEC and its partners can do to squeeze the market further. Deeper cuts are unlikely to garner support, but there is the option to extend the current cuts beyond the June deadline.

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All eyes will, therefore, be on U.S. tight oil production numbers in the months ahead. The medium-term oil price is largely down to shale oil producers’ enthusiasm to increase production at current prices.

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