Oil seen strengthening towards $80
RISE IN US PRODUCTION SET TO COUNTER OPEC, NON-OPEC BID TO KEEP MARKET TIGHT AND PRICES REACHING UPWARDS
Oil prices will continue strengthening towards $80 (Dh293.84) per barrel due to geopolitical uncertainties in the market, but rising US production is expected to counter efforts by the Organisation of Petroleum Exporting Countries (Opec) to curb production and keep the market tight, experts said.
Global benchmark Brent was at $78.51 per barrel, down by 1 per cent, when markets closed on Friday, while US West Texas Intermediate weighed in at $71.28 per barrel.
Oil prices are trading higher due to a production cut agreement between Opec and nonOpec members, healthy demand and geopolitical tensions in the Middle East. The decision by the US President Donald Trump to pull out of Iran nuclear deal also bolstered oil prices in the last few weeks.
“Oil prices have held firm on Friday, continuing the momentum from the geopolitical uncertainties in the market,” said Mihir Kapadia, CEO and founder of Sun Global Investments in London.
Lingering uncertainty
“There is uncertainty lingering as US production is expected to continue to counter Opec’s effort at curbing production and holding the market tight.”
The post-Iran deal suspension period has boosted Brent to three-and-half-year highs of around $80. Overall, oil prices are up 18 per cent this year. Ehsan Khoman, director, head of Research and Mena strategist at MUFG Bank, said the current spot prices will only incentivise shale growth, leading to market share gains that will be difficult to reverse.
“This leads us to the conclusion that today’s actions in support of prices could be laying the foundation for tomorrow’s oversupply,” he told Gulf News.
The other important factor that is likely to affect oil prices in the coming days is the next month’s Opec meeting in Vienna and whether there will be a continuation of the production cut agreement into 2019.
“If Moscow rejects a production cut extension, oil might soften substantially as current prices are fundamentally supported on the prospect of a continued supply squeeze,” said Benjamin Lu, commodities analyst from Singapore-based Phillip Futures.
Opec and non-Opec members led by Russia are cutting production by about 1.8 million barrels per day to reduce global oil inventories and support oil prices. The agreement will continue until the end of this year.
Francisco Quintana, head of strategy at Foresight Advisors, said an oil price of $60 per barrel is unlikely this year.
“It would require either a serious economic downturn or the Opec agreement breaking up. None of these seems probable in the near term. Oil will be hovering around the high 70s and low 80s for the remainder of the year.”
The US oil rig count held steady last week after rising for six weeks in a row even as crude prices soar to multiyear highs, prompting drillers to extract record amounts of oil, especially from shale.
The total oil rig count held at 844 in the week to May 18, General Electric Co’s Baker Hughes energy services firm said in its closely followed report on Friday. More than half the total oil rigs are in Permian basin in west Texas and eastern New Mexico, the nation’s biggest shale oilfield. Active units there increased by four last week to 467, the most since January 2015.
The US rig count, an early indicator of future output, is much higher than a year ago when 720 rigs were active as energy companies have been ramping up production in tandem with Opec’s efforts to cut global output in a bid to take advantage of rising prices.
US crude futures traded over $72 (Dh264) a barrel last week on concerns that Iranian exports could fall because of renewed US sanctions, their highest since November 2014. Looking ahead, crude futures were trading
Shale production is expected rise to a record high 7.2 million barrels per day (bpd) in June, with the majority of the increase from the Permian.
around $70 for the balance of 2018 and $66 for calendar 2019.
Shale production is expected rise to a record high 7.2 million barrels per day (bpd) in June, with the majority of the increase from the Permian where output is forecast to climb to a fresh high of 3.3 million bpd, the Energy Information Administration (EIA) last week projected.
Higher capex spending
Earlier this month, the EIA forecast average annual US production would rise to a record high 10.7 million bpd in 2018 and 11.9 million bpd in 2019 from 9.4 million bpd in 2017.
In anticipation of higher prices, US financial services firm Cowen & Co last week said the exploration and production (E&P) companies they track have provided guidance indicating a 13 per cent increase this year in planned capital spending.
Cowen said those E&Ps expect to spend a total of $81.2 billion in 2018, up from an estimated $72.1 billion in 2017. Analysts at Simmons & Co, energy specialists at US investment bank Piper Jaffray, last week forecast average total oil and natural gas rig count would rise to 1,020 in 2018 and 1,125 in 2019.
That is a bit lower than the firm’s projections last week of 1,020 in 2018 and 1,135 in 2019.
So far this year, the total number of oil and gas rigs active in the United States has averaged 987, up sharply from 2017’s average of 876.