Brent slides as US shale barrels forward
Domestic us oil production is barrelling towards 11 million bpd, putting Brent crude on the back foot. There’s a risk of it slipping even further amid uncertainty over the Opec’s next move to shore up and rebalance the market. The pressure is definitely bearing down on the Opec under the current circumstances. In recent developments, the Energy Information Agency forecasts that US shale production is set to rise to record highs, approaching seven million bpd, adding significantly to the overall output from the US oil industry.
What this means for the Opec is that the group, plus Russia, have a stronger challenge than expected to compete for world oil markets. Saudi Arabia and Moscow now face the colossus being steered by the White House towards the ultimate destination of world energy dominance.
The old Chinese adage of every crisis containing an opportunity has certainly come true for US shale. This sector of the US oil market has jumped at the chance to grab market share amid the Opec’s supply cuts. Encouraged by US President Donald Trump’s protectionist stance and reductions in oil imports to America, US shale has invested heavily in boosting its output. The Achilles heel for shale at this point is investor nerves; after all, the stakes are high given the huge increases in investment.
Energy shares are highly sensitive to any signs of trouble and have the potential to drag on overall stock market performance. Trump’s recent ousting of oil-industry insider Rex Tillerson as secretary of state and his replacement with the wild-card appointment of neo-conservative Mike Pompeo led to uncertainty in the US energy markets. Nerve-driven sell-offs are par for the course in the choppy waters of the oil markets.
On the other side of the scale is the Middle East. Former Exxon top executive Tillerson’s sure hand and knowledge of international oil is being replaced by Pompeo’s hawkish foreign policy stance. It’s not out of the question that US foreign policy could become more aggressive and revive Trump’s criticism of the nuclear deal made with Iran, meaning that tensions may rise further. The risks in the Middle East appear to fuel short-term rises in the Brent crude price, but not enough to sustain it over $67 per barrel at the time of writing.
US shale’s dramatic increase in production is likely to put off the time when global demand matches global supplies, extending the likelihood of the era of cheap oil lasting longer than the Opec expected. In addition, Saudi Aramco’s delayed IPO may be contributing to the weaker oil prices as investors cast a wary eye at the hesitations. Amongst all the uncertainty, there appears to be one certainty that the Opec should note: its supply cuts have been priced in and the oil markets will need more convincing of the medium-term effect on the global over-supply.
Nerve-driven sell-offs are par for the course in the choppy waters of the oil markets