BRENT-WTI PRICE GAP RAISES SHALE DEMAND

The spread between WTI and Brent prices is spurring demand for US crude oil

The widening price differential between Brent and West Texas Intermediate crude oil has increased demand for shale oil from the US, according to analysts.

Brent crude oil prices are higher by 12 per cent now but WTI prices are expected to rise. WTI crude oil is trading at $56-57 per barrel and Brent at $63-64.

At higher crude oil prices shale oil becomes profitable and its production is likely climb. This could cap the rise in Brent crude oil prices, analysts said.

“Shale oil producers in the US were often selling at a loss just to keep business going. But now their shareholders are advising not to sell at a loss,” said T Gnanasekar, director, CommTrendz Research, a risk advisory firm.

“To encash on the high prices, shale oil producers may not produce in large quantities immediately,” he added.

The average cost of producing shale oil is around $60 per barrel. For some producers, it may be mildly profitable to produce at current crude oil prices.

The spread between WTI and Brent prices is spurring demand for US crude oil. In the last week of October, US crude oil exports reached a new high of 2.13 million barrels per day.

There is also a possibility that OPEC may continue with output cuts implemented a year ago. According to a report by Focus Economics, an economic advisory firm, “Russia and Saudi Arabia are amenable to an extension of the deal well into 2018. US crude oil inventories fell by 2.4 million barrels in the week ended October 27 and brought inventories to their lowest level since January 2016.”

According to the joint ministerial monitoring committee of OPEC and non- OPEC countries, the compliance level in October to last year’s production cuts was 120 per cent, the highest since the start of the agreement. Moreover, Russian and Saudi Arabian officials recently backed an extension of the deal beyond March 2018. On the demand side, healthy macroeconomic figures for both emerging and developed economies could prop up crude oil prices.

“Despite signs that the global oil glut is easing following a three-year downturn, rising output by US shale oil producers and concerns about whether participants in the OPEC deal will stick to their quotas are still putting a dent in the Brent crude oil price trajectory,” said the report by Focus Economics.

“Geopolitical risks in the Middle East will also play a role, especially mounting political tension between Iran and the US, clashes in Iraq between the army and Kurdish forces, and the anti-corruption campaign in Saudi Arabia,” it added.

Another reason for the bullish trend is that oil producing countries may want to take the benefit of higher prices till electric vehicles begin denting fuel demand. “This could tempt OPEC to keep production lower,” said Gnanasekar.