HITTING THE BRAKES

Surging oil production in the US, largely from shale, is holding down crude prices.

PARIS: Surging oil production in the United States is putting the brakes on crude prices, recently in recovery from a long slump resulting from a worldwide supply glut, according to the International Energy Agency.

“Oil price rises have come to a halt and gone into reverse,” the IEA wrote in its monthly oil market report yesterday, saying the “main factor” behind this was booming US oil production.

“For now, the upward momentum that drove the price of Brent crude oil to $70 per barrel has stalled,” it said.

Oil prices fell from giddy heights of $115 per barrel in 2014 to under $35 at the start of 2016.

But the market has observed a turnaround since, and oil prices rose from an average $44 in 2016 to $54 in 2017 to nearly $70 last month.

One of the main factors behind this was a deal struck by Opec countries and other oil-producing countries, such as Russia, at the end of 2016 to throttle production. That deal has since been extended until the end of 2018.

Nevertheless, wooed by rising crude prices, shale producers, particularly in the US — who are not party to the deal — are ramping up output to cash in on the boom.

And that, in turn, is jeopardising the delicate balance that the market has now reached.

“In 2018, fast rising production in non-Opec countries, led by the US, is likely to grow by more than demand,” the IEA said.

In just three months to November, crude output in the US increased by a colossal 846,000 barrels per day, “and will soon overtake that of Saudi Arabia,” the agency said. “By the end of this year, it might also overtake Russia to become the global leader.”

Shale production is controversial, because in order to extract oil and gas, a high-pressure mixture of water, sand and chemicals is blasted deep underground to release hydrocarbons trapped between layers of rock.

And environmentalists argue that the process — known as fracking, or hydraulic fracturing technology — may contaminate ground water and even cause small earthquakes.

The IEA said that the current situation was “reminiscent of the first wave of US shale growth that, riding the tide of high oil prices in the early years of this decade, made big gains in terms of market share.”

“Today, having cut costs dramatically, US producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth,” the IEA said.

“This was a sobering thought for other producers currently sitting on shut-in production capacity and facing a renewed challenge to their market share,” the agency pointed out.

The IEA also noted that trade patterns were changing, and the US was, for example, now exporting to the United Arab Emirates.

“Such a development would have seemed incredible a few years ago, now it looks like the shape of things to come,” it said.

Nevertheless, the components of the oil market balance are dynamic and a lot could change in the next few months, the IEA cautioned, pointing to the deteriorating situation in Venezuela, a member of the Organization of the Petroleum Exporting Countries.

The apparent buoyancy of the global economy was also a factor to watch.

“It could deliver higher demand growth than we currently anticipate. As a result, prices could be maintained at recent levels even as US production rises,” the IEA suggested.

“All in all, however, the underlying oil market fundamentals in the early part of 2018 look less supportive for prices,” it concluded.

Oil prices were slightly firmer on the day in morning trading in Europe yesterday, with WTI futures at $59.50 and Brent Crude at $62.85.

LONDON: The Organization of the Petroleum Exporting Countries said on Monday world oil demand would grow faster than expected in 2018 because of a healthy world economy, adding a tailwind to the producer group’s effort to remove a supply glut by cutting output.

“But the global market will return to balance only towards the end of 2018, no earlier than previously thought, as higher prices encourage the United States and other non-member producers to pump more,’’ Opec said in a monthly report.

The intergovernmental organisation said world oil demand would rise by 1.59 million barrels per day (bpd) this year, an increase of 60,000 bpd from the previous forecast.

“Recently, healthy and steady economic development in major global oil demand centres was the key driver behind strong oil demand growth,” Vienna-based Opec said in the report. “This close linkage between economic growth and oil demand is foreseen to continue, at least for the short term.”

Oil prices held on to earlier gains after the release of the report, trading just below $64 a barrel. Prices topped $70 this year for the first time since late 2014, supported by the Opec-led cut and robust demand.

Balancing the higher demand forecast, Opec said the United States and other outside producers would boost supply by 1.4 million bpd this year, up 250,000 bpd from last month and the third consecutive rise from 870,000 bpd in November.

“The steady oil price recovery since summer 2017 and renewed interest in growth opportunities have led to oil majors catching up in terms of exploration activity this year, both in the shale industry and offshore deep water,” Opec said, referring to the US outlook.

“The market is only expected to return to balance towards the end of this year.”

Opec’s assessment of when the market would rebalance is no earlier than its previous projection, despite the outlook for higher demand, falling inventories and strong compliance with the supply-cutting deal.

Opec’s stated goal, through a deal starting a year ago to cut output with Russia and other outside producers, is to reduce oil inventories in developed economies to the five-year average. They have extended the pact until the end of 2018.

In a further sign of progress, Opec said inventories in those economies declined by 22.9 million barrels in December to 2.888 billion barrels, 109 million above the fiveyear average.

Opec compliance remains strong. In January, Opec output fell by 8,000 bpd to 32.302 million bpd, the report said. Adherence by the members with output targets rose to 137%, according to a Reuters calculation, up from December.

The report gave contrasting figures on production in Venezuela, where output has been dropping due to an economic crisis.

Venezuela told Opec its production recovered in January to 1.769 million bpd from December’s multi-decade low, while figures from secondary sources that Opec uses to monitor its output showed a decline to 1.60 million bpd, a new low.

Opec uses an average of figures from six secondary sources to monitor its output rather than countries’ own due to old disputes about real production rates.

With outside producers expected to increase supply this year by more than the upward revision to demand, Opec in the report cut its estimate of the global requirement for its crude in 2018 by 230,000 bpd to 32.86 million bpd.

Should Opec keep pumping at January’s level and other things remain equal, the market could move into a deficit of about 560,000 bpd, suggesting inventories will be drawn down further.

Last month’s report pointed to a larger deficit of about 670,000 bpd.