US Record High Output Eases Fear of Market Tightening

Russia is willing to boost oil output even further if necessary. File Image / Pixabay

What a difference a week makes: expectations of a global market tightening for crude have been replaced by the growing sentiment that we may soon return to a surplus, and this notion was given further credence on Monday with the U.S. Energy Information Administration stating that American shale output is expected to rise by 143,000 barrels per day (bpd) to a record 7.47 million bpd in August.

The rise will come from the country's seven major shale formations, the largest being 73,000 bpd in the Permian Basin of Texas and New Mexico.

The EIA in its monthly report also said producers drilled 1,436 wells and completed 1,243 in the biggest shale basins in June, leaving total drilled but uncompleted wells up 193 at a record high 7,943.

Another sign the marker abounds with crude came in the form of U.S. president Donald Trump's administration reportedly considering selling 5 million to 30 million barrels from the Strategic Petroleum Reserve into the market, as well as a larger release that would be coordinated with other nations (the U.S. currently holds 660 million barrels of oil in reserve).

ING said in a research note, "If Trump continues to believe that OPEC [the Organization of the Petroleum Exporting Countries] are not doing enough [to reduce oil prices], we would not rule out an SPR release from the US, or possibly even export restrictions on petroleum products."

Of course, there is still considerable concern over the U.S. sanctions against Iran reducing exports from that country to zero by the end of this year, but even on that front, Russia expressed confidence that they can compensate: Alexander Novak, energy minister for the former Soviet Union, told media, "If we need more than 1 million bpd, I don't rule out that we can quickly discuss it and make a quick decision."

He was referring to OPEC and other key producers recently agreeing to increase combined oil output by 1 million bpd, of which Russia's share is 200,000 bpd.

But even though analytical fears of market tightening seems to be far less palpable this week, the experts are reluctant to make any dramatic predictions about short-term oil prices; in fact, JP Morgan thinks they will be higher than the investment bank previously thought, at an average of $70 per barrel for both this year and 2019 (up from the previous forecast of $65 and $60 respectively).

Still, $70 is a far cry from the triple digit prices many experts were recently predicting, and JP Morgan also noted that prices would be capped by "rising OPEC spare capacity and short-cycle U.S. shale well economics against a muted demand growth-backdrop in 2018/19."

Accordingly, it revised its 2018 demand-growth outlook to 1.2 million bpd from 1.4 million previously, though its 2019 forecast edged up to 1.1 million bpd from 1 million.

Earlier this month, David Demshur, president and CEO of Core Laboratories, echoed the sentiments of many of his colleagues when he said, "Right now we are seeing a big uptake in the amount of crude being used; my fear...is that when we go to later this year into next year and 2020, we see $100-plus crude prices again."