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Shale boom to keep oil markets under pressure

Trump’s May 12 decision on Iran could either see crude extend gains or trigger a deflation of risk premium

Gulf News

Abu Dhabi: Oil markets are expected to remain pressured throughout 2018 due to a rise in shale production, experts said.

Oil prices are currently trading higher due to the strict implementation of an output cut agreement by the Organisation of Petroleum Exporting Countries (Opec) and non-Opec members, which seeks to lower global oil inventories to a five-year average level, as well as concerns over supply disruptions if sanctions on Iran are reintroduced.

“Oil prices are being weighed down by the usual threat from the US — swelling US crude inventories and record weekly US production. While the concerns about US production undermining the efforts of Opec are making markets nervous, the losses are minimal as the markets are also on the edge over the potential new US sanctions on Iran,” said Mihir Kapadia, CEO and founder of Sun Global Investments.

With US production rising to a record 10.62 million barrels per day (mbd), the US now produces more crude than Saudi Arabia, the top exporter, he said.

“It is expected that the US will surpass Russia’s 11 mbd by the end of the year. This will mean, oil markets will continue to be under pressure throughout 2018.”

Echoing similar views, Spencer Welch, director of oil markets and downstream at London-based IHS Markit, said the current increase in oil prices was not supported by fundamentals, adding that US production is rising very fast. “It [oil price] is unlikely to go much higher,” he told Gulf News.

Opec production deal

When asked whether Opec and non-Opec members will end the production cut agreement that has been in force since early 2017, Welch said if 1.8mbd of oil were suddenly returned to the market, the move would certainly knock the price down.

“Also, some Opec producers are getting used to the higher price and might even want to push it above $80 [Dh293.84] per barrel if they can,” Welch said.

“Russia is the country most likely to be concerned by the higher price, which strengthens the rouble and makes their other exports less competitive. They might also be concerned about losing market share to the US.”

Opec countries and non-Opec members led by Russia have cut production by about 1.8 mbd since January 2017 to stabilise oil prices and bring down global oil inventories.

When markets closed on Friday, Brent, the global benchmark, was trading at $74.87 per barrel, up 1.70 per cent, while West Texas Intermediate (WTI), the US benchmark, traded at $69.72 per barrel, up 1.89 per cent.

Ole Hansen, head of commodity strategy at Saxo Bank, said in a note that US President Donald Trump’s May 12 decision on whether to step away from the Iran nuclear deal could see crude oil either extend its current run of gains or trigger a deflation of the risk premium that has built up in recent weeks.

“The lifting of sanctions at the beginning of 2016 helped trigger [a] 1 mbd increase in Iranian oil production to 3.8 mbd. A reintroduction of sanctions without seeing other Opec members increase production could remove an estimated 300-500,000 bpd of Iranian barrels,” said Hansen.

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