NEW YORK (Bloomberg) -- The relentless drilling ramp-up in America’s top shale plays is making investors more skeptical that an oil price rebound is on the horizon.
After increasing their bets on rising West Texas Intermediate crude for three straight weeks, money managers slashed the wagers by 21%, according to U.S. Commodity Futures Trading Commission data. Producers in Texas are leading the longest shale revival since 2011, making OPEC-led efforts to rebalance the market increasingly difficult.
After the year started on a bullish note, with prices in New York topping $55/bbl as Saudi Arabia, Russia and other major exporters began to cut production, the rally has staggered. Saudi Arabia’s Energy Minister Khalid Al-Falih has admitted the first three months of supply curbs failed to bring inventories below the five-year average. As optimists lose heart, prices fell back below $50 last month.
There’s still a lot of talk about high inventory levels, Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, said by telephone. Investors felt that prices had “gone up too much compared to the fundamentals. The shale oil production trend is definitely bullish, which is bearish for prices.”
This month’s production in the top U.S. shale plays will reach about 5.2 MMbpd, the highest level since November 2015, according to the Energy Information Administration. As producers pour billions of dollars of investment into fields like the Permian and Eagle Ford in Texas, the country’s oil-rig count has more than doubled in a year to 697 last week, according to Baker Hughes Inc.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
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