Brent pressured by higher US output
US shale February output may hit 6.5 million barrels per day rising 111,000 bpd from January.
The oil bears enjoyed a victory roar in recent days. The Brent oil price fell off the cliff, and there's no doubt it was pushed. The prime suspect is US shale, which burst aggressively back on the scene as of mid-January. The US domestic oil producers have recovered with redoubled efforts to get more crude onto the domestic and world markets.
The US Energy Information Agency forecasts that US shale's February output will grow significantly. The monitor's estimate puts US shale output at 6.5 million barrels per day, an increase of 111,000 bpd versus January. Production is expected to rise in almost all the shale production basins. The price drop seems definitive; Brent oil fell from $71.28 per barrel to $61.76 per barrel before struggling back up to $65 per barrel in the first half of the month. Does this mean it's case closed for Brent oil? Motive, means and opportunity are all there for US shale to get away with pushing the price down and potentially glutting the market again.
Perhaps that's a strong argument, but the other major market force - Opec, still has some defensive weapons in its armoury of supply policies. In recent developments, Opec announced that compliance with its supply cuts is at 133 per cent, a significantly higher level than 2017. Opec's decision to initiate and maintain supply cuts has supported the oil price, but non-compliance in 2017 undermined investor confidence. Iran and Iraq's cases are an additional handicap for Opec's compliance boasts. Both countries have increased production instead of reducing it. No matter how concerning this is, one could take some reassurance from that Venezuela's case. The country's output has declined fast amid political turbulence, acting as a partway counterbalance to Iran and Iraq's production boosts.
Until Opec's technical meeting in June, the group's main option appears to lie in reassuring messages about its determination to stick to supply cuts. Could there be deeper supply limits ahead? If Opec is indeed mulling such a policy to shore up the price, it seems unlikely anything will be done before the first half of the year is over. Arguments against deeper supply cuts may come from compliant Opec members who may feel they are already missing out on much-needed sales and revenue. Extending supply cuts for another year may be another unavoidable move in the stalemate with US shale. What seems certain is that the main fundamental players moving the oil prices are still US shale and Opec, and this is important for investors to factor in when deciding on their trades. The demand side - while growing in power - is still weaker than the supply side in the current equation.
Geopolitical factors are in the back seat at the time of writing, although it is never wise to take your eyes off the road when it comes to regional tensions in the Middle East. In the wings are the potential tariffs that could be slapped on oil imports to the US. Back to the main drivers in this period, based on the balance-counterbalance between Opec and US domestic oil production, Brent crude could stay range-bound between $62-$67 per barrel in the short term.
The writer is chief market strategist at FXTM. Views expressed are his own and do not reflect the newspaper's policy.