The top of the oil market may be closer than we think.
According to the International Energy Agency there is a light in the tunnel for the prices of the oil,with Brent futures having bounced back to $40 a barrel. Even so, many analysts warn that, like the failed rally last year, this recovery will sputter once prices go high enough to keep U.S. crude flowing.
Falling U.S. production is the key dynamic you need to get supply to equal demand, and that might not actually happen,” meaning prices could fall again.“If prices keep going up, U.S. production from shale producers is extremely responsive,” Jamie Webster, vice president of crude markets at IHS Energy, said in a Bloomberg Television interview.Brent futures have recovered about 40% from the 12-year low of $27.10 reached in January. With output outside the Organization of Petroleum Exporting Countries set for its biggest slump since 1992, “prices might have bottomed out,” according to the IEA. While U.S. crude production has retreated 5.5% since last summer, the process of depleting bloated inventories is just getting started, according to Goldman Sachs. The bank, which foresaw oil’s plunge into the $20s, predicts prices still need to stay low enough to starve producers of capital, otherwise the output losses necessary to remove the supply surplus won’t happen. The price of oil has to rise to balance the market in the medium run, and the medium run might be sooner than people think.
The resilience of U.S. production has taken OPEC by surprise, Secretary-General Abdalla El-Badri said last month. Break-even prices at North American shale wells declined by 40 percent between 2013 and 2015, according to consultant Rystad Energy AS. Crude output remains near 9 million barrels a day even as data from Baker Hughes Inc. shows drillers are using the fewest rigs since 2009.
The reduction in costs makes OPEC’s forecast for a 700,000 barrel-a-day contraction in non-OPEC output this year “more uncertain,” the group said in its monthly oil-market report Monday. As a result of efficiency gains, the “shale band” — the price range that allows output to be profitable — has fallen by about $10 since last year to $45-$55 a barrel, said Olivier Jakob, managing director at consultant Petromatrix GmbH, who originated the term. This year’s rally has already buoyed U.S. drillers, who raised $10 billion of extra funds on Wall Street.