US shale production and Opec cuts will affect oil more than ship seizure
Oil prices rose yesterday after the seizure of a British tanker by Iranian forces in the Strait of Hormuz on Friday stoked fears of supply shortages. The takeover came just weeks after two oil tankers in the region were attacked, with the blame pinned on Iran.
This waterway is important for the industry because a fifth of all production flows through it, with Iran and Iraq to the north, and the Arabian peninsula to the south.
Brent crude rose as much as 1.5pc to $64 a barrel in response to Friday’s events, sending shares in companies such as BP and Shell up 1.5pc and 0.9pc respectively.
So what do events like this mean for oil prices? In short, probably not a huge amount.
Even if these skirmishes in the Gulf escalate further, the result is more likely to be a sharp but short-lived increase.
“Markets don’t really believe Iran can be a significant disruptive factor, like in the past,” says Colin Smith, director of oil and gas research at Panmure Gordon.
Several factors affect the oil price: the state of the global economy, geopolitical tensions, the Us-china trade war, central banks’ interest rate decisions, Opec production, the push for renewable energy – and US shale production.
These tend to pull and push prices, but what tends to influence long-term oil prices more is the balance of supply and demand. That is largely
determined by the amount of supply coming from Opec-producing countries and how much oil the US is pumping.
The expectation among many analysts for the year ahead, barring any major disaster, is that prices will not tumble drastically, but will largely stagnate and possibly edge down a little.
Analysts predict that output in the US will continue to grow strongly due to its shale bonanza. Production there has become cheap on the back of better drilling methods, new technology and consolidation in the industry as oil majors have moved in.
This will offset production cuts from Opec-producing countries, leaving the market broadly balanced, but vulnerable to short-term impacts such as trade disputes, economic growth indicators, central bank decisions on interest rates and geopolitical clashes.
Next year Opec needs to cut production by around half a million barrels a day to support oil prices.
Panmure’s Smith reckons this reduction will happen “naturally” due to production issues in Venezuela, Iran and Libya, which are formally exempt from making cuts. “The market will effectively stay balanced thanks to a little bit of serendipity,” he adds.
Stuart Joyner, an oil and gas specialist at Redburn, is a little more bearish. “Shale production from the US will more than offset any cuts that Opec has planned at the moment,” he says.
“The question for Opec in 2020 is do they cut further, and effectively give up market share to the US onshore producers, or not?”
Accordingly, Redburn predicts prices could fall back towards $60 a barrel or a little lower around the third quarter and into the new year, while Smith’s expectation is for prices to remain stagnant, at about $65 a barrel. Neither scenario is particularly drastic.
“Markets are quite concerned that oil demand will be weaker than forecast and we will be oversupplied next year,” adds Smith.
“Things like interest rate cuts or a resolution of the China-us trade talks would be a bit more supportive of the demand outlook and hence price, but it would take quite a lot more to drive a significant increase in prices for any length of time.”