After a recovery late last year, the oil market seems to have settled with a price around $55 a barrel… at least for now. That level is not likely to dissuade consumption but most Organization of Petroleum Exporting Countries members seem to feel it justifies their oil output cut agreed to late last year.
A few producers, such as Venezuela, that are running massive budget deficits have targeted $70 or more, but most analysts would agree that if oil can hang onto recent price gains for the next six months it will be doing well.
OPEC has agreed to cut production by 1.2 million barrels per day (bpd) to 32.5 million bpd from Jan. 1 according to Reuters, in an attempt to clear a global oversupply that has depressed prices for more than two years. Russia and other key exporters outside OPEC, in an unprecedented move, joined in the agreement and added a further 500,000 barrels of cutbacks.
What Cutbacks?
The extent to which these cutbacks are being implemented varies. Russia committed to 300,000 bpd cut during the first half of 2017 but Russian oil and gas condensate production averaged 11.1 million bpd during the first two weeks of January, down only 100,000 bpd from December.
Saudi Arabia, on the other hand, is, according to the Telegraph, understood to have reduced production by more than the Middle Eastern production leader agreed to, just under 10 million bpd this month. The International Energy Agency (IEA) says it expects the balance between supply and demand to be restored by the middle of this year as demand growth and a more managed supply market combine to eliminate surpluses.
Why Are Prices Falling?
So, why has the oil price eased over recent days and crude oil futures fallen some 5% since their early January peaks? It would seem the markets have doubts as to whether surpluses are really a thing of the past. OPEC and its partners have only agreed to limit output for an initial six months.
What happens after that remains to be seen. In the meantime, the 800-lb. gorilla — U.S. shale production — is on the rise. With the rig count up more than 200 rigs from its low point last May, an increase of more than 65% according to Oilprice.com, it’s no surprise that U.S. oil output is increasing again.
The EIA estimates that U.S. oil output jumped from 8.77 million bpd in the last week of 2016 to 8.946 million bpd for the week ending January 6. Nearly 9 million bpd from a low point of 8.5 million bpd at the end of the summer. Clearly, U.S. oil output is rebounding strongly. Just last month, the EIA was predicting an 80,000-bpd decline in U.S. output. It has now revised that to 110,000 bpd increase for 2017. Based on January production, so far, they may be forced to revise that upward again.
Seen against the backdrop of recovering U.S. output, patchy cutback compliance among OPEC and its partners,and sluggish Asian demand growth, it’s not surprising the market is cautious about further oil price gains this year.