U.S. surge hampers oil price’s rebound

Oil risks sliding back under US$60 a barrel as a surge in U.S. shipments to Asia threatens to undermine a deal between OPEC and its allies, according to ING Groep NV.

While the producer group complied with a pledge to curb output and ease a glut in 2017, U.S. flows that are gaining a bigger slice of the prized Asian market may prompt some nations to boost supplies, said Warren Patterson, a commodities strategist at the Dutch bank. The resulting fallout could drag down crude prices after a rally of more than 40 per cent since June, he said.

“The longer the deal goes on, it’s going to start falling apart,” Patterson said, referring to an outputcut agreement between the Organization of Petroleum Exporting Countries and other producers including Russia. “They continue to give market share away to the U.S.”

Brent crude, the benchmark for more than half of the world’s oil, traded at US$65.07 a barrel in London on Monday, compared with about US$45 in June. ING predicts Brent at US$57 in the second half of 2018. West Texas Intermediate, the U.S. marker, is now near US$62 a barrel.

Crude’s rebound since last year is encouraging U.S. drillers to pump even as they try to be disciplined on spending, Patterson said. “We need to see prices in the short-term trade below US$60 to reduce that incentive for U.S. producers,” he said.

As American output continues to expand, more exports will sail to Asia, the traditional bastion of Middle East producers. In February, even Saudi Arabia’s state oil company considered participating in these flows via a U.S. unit, before determining it wasn’t economically viable at the time.

ING’s outlook is in contrast to bullish views from Royal Bank of Canada and Goldman Sachs Group Inc. to BMI Research and Societe Generale SA, which see prices supported as strong demand soaks up supply from the U.S. Patterson said growth may slow and fail to fully absorb gaining American output.

While the U.S. is now pumping more than 10 million barrels a day, surpassing a record set in 1970, that boom is being accompanied by a surge in overseas shipments, helping drain stockpiles at the nation’s largest storage hub. Exports have averaged about 1.5 million barrels over the past six months, almost double the level in the previous six months, Energy Information Administration data show. Asia is the biggest buyer of the supplies.