Oil rally stumped by supply worries

OPEC said Thursday that it expects U.S. oil production to increase as prices stay high enough to offset the rising costs of oil field services, adding to worries that new supplies will tamp down the rally that has pushed oil prices back above $60 a barrel.

Despite a plunge in U.S. commercial crude inventories, oil prices slipped to settle at $63.95 a barrel in New York, down 2 cents, as traders resurrected an old, but persistent concern that increasingly efficient shale drillers will ramp up output and overwhelm OPEC’s efforts to curb production. U.S. oil companies could make “decent” returns at $53-a-barrel oil and could remain profitable at $60 a barrel even if oil field service costs rise 15 percent this year, the Organization of the Petroleum Exporting Countries said in its monthly oil-market report, citing research by JPMorgan Chase & Co.

OPEC, citing Energy Department data, noted that U.S. shale production jumped to 5 million barrels a day in November, up from a multi-year low of 4.11 million barrels a day in

September 2016.

“It is costing more to rehire skilled workers owing to a tightened labor market and the availability of equipment,” OPEC said. “But producers are still able to achieve decent rates of return.”

In a separate report, the Swiss financial services company UBS said it expects oil prices to sink later this year as U.S. drillers respond to $60 a barrel oil and push global output higher than demand. A surge in U.S. production to record levels this year could slow the realignment of global oil supply and demand after inventory levels fell at the fastest rate since 2002 last year, the bank said.

The Energy Department projects the U.S. oil production will climb above 10 million barrels day for the first time later this quarter.

UBS believes global oil production will increase by 1.9 million barrels a day this year, up from growth of 400,000 barrels a day in 2017, while demand grows at 1.4 million barrels, down from 1.6 million barrels last year. That could mean the oil market will move from a market deficit to a balanced market this year, and prices could sink to $53 a barrel by the end of the year.

”Supply growth overshadowing demand growth should be the main topic for the energy market in 2018,” the bank said. “We think this sets a backdrop of lower prices over the course of the year.”

Such a prospect helped push prices — which last week climbed to a threeyear high above $64 a barrel — as low as $63.47 Thursday. Prices, however, recovered after the Energy Department reported that commercial crude inventories fell by nearly 7 million barrels last week — the ninth consecutive weekly decline. Crude inventory levels are at their lowest volumes since March 2015

Gasoline stockpiles rose by 3.6 million barrels, but that increase was more than offset by the fall in distillate inventories. Distillates — used to make diesel and heating oils — fell by 3.9 million barrels.

With declines of propane, propylene and other refined products, total petroleum stocks declined by a 13.8 million.