Libyan Revival, Speculators Adding Downward Pressure to Oil Prices

U.S. shale output is expected to reach record highs next year.

The U.S. Energy Information Administration on Tuesday delivered the worst kept secret in town by stating that higher crude output from the U.S. - a rise of 440,000 barrels per day (bpd) to 9.31 million bpd in 2017 - should limit any price upside in the foreseeable future.

Howard Gruenspecht, acting administrator for the EIA, said in a statement, "Higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018."

Equally troubling, the numbers of EIA's U.S. demand forecast are tepid compared to output growth: the organization expects demand for 2017 to rise 290,000 bpd, up from its previous forecast for a 250,000 bpd increase; demand in 2018 is expected to increase by 300,000 bpd, down from a previously forecast rise of 340,000 bpd.

John Kilduff, founding partner at Again Capital, thinks the bad news is only beginning: he told Bloomberg, "We're only starting to see the shale rebound reflected in supply.

"The production gains so far this year have mostly come from offshore platforms in the Gulf of Mexico; production is going to rise further in the months ahead because of shale."

Kevin Headland, senior investment strategist at Manulife Investments, also sees downward market pressure: he told Bloomberg television that bear speculators are pushing down prices, with money managers having largely given up their long positions and taking a wait and see approach due to crude's steep plunge over the past month: "The shorts are really coming on strong."

Of course, a bearish sentiment and U.S. full-tilt drilling are only two factors that continue to spell woe for market potential in the near-term: Kilduff also noted that "Libyan production is racing back, adding a significant slug of oil to the market, which will be difficult to incorporate."

Earlier this week, Mustafa Sanalla, the chairman of state producer National Oil Corp., said Libya's output has reached 796,000 bpd.

Kilduff went on to say that "OPEC threw everything at the market yesterday and prices barely moved; there are real doubts about the effectiveness of the accord."

Indeed, the market on Monday posted only mild gains as OPEC and Russia suggested their production cutback initiatives could be extended through 2018 as well as to the end of this year; the news caused analysts such as Michael Lynch, president of Strategic Energy & Economic Research, to remark that "if they come up with some kind of formal agreement and other countries sign off on it, that would be more meaningful."