U.S. shale spoiling the rally in oil prices

Economists at OPEC warned last year that anything above $50 per barrel could push U.S. shale oil producers into overdrive.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Jan. 19, 2018 at 9:52 AM
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Jan. 19 (UPI) -- Oil prices pulled away from the record territory set in previous sessions on Friday after reports validated concerns about supply-side strains from U.S. shale.

A geopolitical risk premium emanating from North Korean nuclear tensions, U.S. sanctions on Iran and general global unrest helped push crude oil prices to fresh highs this year. The early January rally was supported by a late 2017 decision by the Organization of Petroleum Exporting Countries to extend an effort to balance an oversupplied market through this year.

The rise of U.S. shale oil production, coupled with a previous OPEC policy to defend a market share with robust production, pushed oil prices to historic lows two years ago. OPEC's new policy helped set a floor under crude oil prices at around $50 per barrel, but a runaway market had sparked concerns that too strong of a rally would invigorate U.S. shale.

OPEC economists in October expected the price for West Texas Intermediate, the U.S. benchmark for the price of oil, to be in a range between $50 per barrel and $55 per barrel for 2018. Any rise above that would encourage U.S. oil producers to expand drilling activity, a scenario that could eventually lead to more robust production levels, they said.

WTI started 2018 above $60 per barrel. In its latest monthly market report, the U.S. Energy Information Administration said total U.S. crude oil production could average 10.3 million barrels per day this year, up 10 percent from last year. Next year's output could increase by another half million barrels per day.

U.S. oil production is offsetting OPEC's effort to balance the market. A committee monitoring the agreement, led by Russia and Saudi Arabia, meets soon to review the market situation.

The price for Brent crude oil was down 1.2 percent at 9:12 a.m. EST to $68.47 per barrel. WTI, the U.S. benchmark, was down 1.27 percent to $63.14 per barrel.

In its monthly market report, the International Energy Agency warned demand was faltering as U.S. shale oil production improves. For the year, it saw global demand increasing by an average of 1.3 million barrels per day, which it said was rather conservative given the general health of the global economy.

Its demand forecast "takes into account the fact that benchmark crude oil prices have increased by 55 percent since June and this can dampen oil demand growth to some extent," the report read.

On U.S. shale oil production, the IEA said growth may be unrivaled.

"It is possible that very soon U.S. crude production could overtake that of Saudi Arabia and also rival Russia's," it said.

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