Crude Oil Snaps Out Of Brief Funk

Jon Howard
February 5, 2018

Oil rose for a third day on Friday after a survey showed strong compliance with output cuts by OPEC and others including Russian Federation, offsetting concerns about surging USA production. Producers have pulled back from marginal areas to the most productive "core" parts of shale plays such as the Permian in western Texas and eastern New Mexico.

"The rebalancing of the oil market has likely been achieved, six months sooner than we had expected", Goldman's analysts wrote. Overall market conditions remained strong due to the production cuts and healthy demand-growth.

Goldman joins other Wall Street banks including Morgan Stanley and JPMorgan Chase & ratcheting up its outlook, as economic growth and output cuts led by the Organization of Petroleum Exporting Countries have helped to boost prices. Given that Oil is quoted and traded in U.S. Dollars, a rise in the U.S. currency is a direct hit to Oil prices. "Crude oil imports are down 20 percent from 2006 and, today, we are competing with the Middle East in the export market".

In 2017, world production was estimated at 97.3 million b/d, and this could reach more than one hundred million b/d by 2019 depending on the growth in US production and whether OPEC members comply with a 2017 production agreement that curtailed supply.

He added, "Saudi and Nigerian output rose last month, but the increasing loss of Venezuelan barrels have reached a point that it is starting to be felt, and it is a grade of crude, relied upon by US refiners that is not easily replaced".

The domestic production surge pushes the United States ahead of Saudi Arabia as the world's No. 2 oil producer and puts the country on pace to become the top oil producer by the end of next year.

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Brent crude, the global benchmark, was down 0.10% at $69.58 a barrel on London's Intercontinental Exchange.

Production has doubled over the last 10 years, from a low of around 5 million bpd in 2007, reversing decades of decline since the 1970s.

The bank also said rising USA shale supply actually will be needed to keep the market steady in the near-term, since any ramp-up in OPEC output will lag the rebalancing.

The aggressive bullish run that's been seen in Oil prices over the past seven months softened this week in both WTI and Brent.

"There's no doubt shale players will respond to higher prices", says Jan Edelmann, commodity analyst at HSH Nordbank AG. American drillers last week added 12 oil rigs, the most since March.

In January the biggest increase in supply came from Nigeria, where some shipments originally planned for export in December slipped into January, according to loading programmes and tanker data.

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