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Contrary to some conventional wisdom, it’s not necessarily overzealous shale players in North America throwing off the supply and demand balance that’s rocked crude oil prices during the last two years.
Even if U.S. shale production increases by several thousand barrels per day this year, that volume is but a fraction of the barrel totals put on hold by OPEC and non-OPEC nations through production cuts announced in November, said Andrew Slaughter, executive director at the Deloitte Center for Energy Solutions.
“In terms of global balances, it’s not in the same order of magnitude,” he said. “We don’t extrapolate from one source of supply to say it’s indicative of the whole balance. You have to add everything up. It offsets it to some extent, but it doesn’t completely negate the effect of the OPEC cuts.”
Rather, it’s the stockpiled inventories that determine how close the market is to reaching balance, he said. And that’s the one piece of the puzzle that hasn’t yet dropped into place.
If OPEC moves to extend current cuts, which are being met by roughly 80 percent compliance, for another nine to 12 months, even prodigious U.S. shale production won’t prevent inventory numbers from dropping.
“Once those inventory numbers start dropping, then the downward pressure on prices mitigates quite a lot and quite quickly,” Slaughter said. “I tell people just watch the inventory numbers and that will tell you what’s going on. There’s a bit of a lag, and that’s the key to the whole conundrum.”
According to EIA, the U.S. crude oil stockpile (as listed in the thousands of barrels) has vacillated somewhat since November:
- November 2016 – 1,183,230
- December 2016 – 1,173,094
- January 2017 – 1,189,841
- February 2017 – 1,215,260
- March 2017 – 1,227,678
- April – 1,217,110
The longer production cuts are in place, the more inventory drawdowns can shift the supply balance. As such, although oil prices aren’t expected to hit the coveted $65 per barrel mark by year-end, a comfortable mid-$50s level is feasible.
Before OPEC, Russia and other non-OPEC nations announced crude volume cuts, global oil benchmarks were in the low $40s per barrel. Prices rallied on the quota news and have generally hovered within arm’s length of $50 oil in 2017. An extension would put another floor beneath global benchmarks, Slaughter said.
“As the market sees inventories come down – if indeed they do – over the balance of the year, (prices may) move into the mid- to high-$50 range around the turn of the year, if compliance holds up,” he said. “It’s certainly not a return to $90 or $100 very quickly, if at all, but it’s certainly a better price environment than last year.”