UNITED STATES – This year the confrontation between the US shale sector and OPEC will remain the dominant factor in the oil market, while the warring parties can keep prices for “black gold” in a relatively narrow price range.
Market sentiment changed a lot last month: a reduction in OPEC production triggered bullish sentiment and a significant price increase in January. However, the surge in shale oil production in the US quickly cooled the fervor of speculators and prices drastically receded from their highs amid fears of another decline, says oil market expert Nick Cunningham in his review.
This dynamic – a frequent change in prices and sentiments – may continue for quite some time. Nevertheless, while OPEC and slate producers are competing, the oil price borders will remain in the range from $ 60 to $ 75 per barrel of Brent brand, the new report of the Oxford Institute of Energy Studies (OIEI) says.
If prices approach the upper end of this corridor, shale oil production in the United States will accelerate, which will inevitably lead to an increase in supply in the market and lead to lower prices. Nevertheless, it is unlikely to fall below $ 60, as OPEC continues to limit the flow of oil to the market. In addition, demand for “black gold” remains high and it will easily absorb most of the incoming additional oil.
In general, prices are likely to remain in the range from $ 60 to $ 70. OIEI expects this year the average price for Brent at $ 67 per barrel.
The basis for this forecast is the variation of the “shale strip” theory that appeared a few years ago (the price range at which production remains profitable). According to this theory, the corridor from $ 40 to $ 60 is optimal for American slate.
When prices fall below $ 40, shale producers stop mining, which pushes prices up. When prices reach $ 60 and above, a new wave of shale production appears, which immediately pulls down oil prices.
This theory, in principle, is relevant today, but it does not take into account one important factor. Members of OPEC decided to raise the minimum price level, depriving the market of 1.8 million barrels a day (this agreement has been in effect for over a year). Now the lower limit for Brent, rather, at $ 60, not $ 40 – $ 50.
Of course, this is only a forecast and the situation can drastically change for different reasons: prices can rise above or below the range of $ 60- $ 75. In addition, OPEC’s future failure to cut production may be more chaotic than the market is currently expecting.
First, the situation can dramatically change the higher level of production in Nigeria, Libya or Iraq. If this happens, other members of the cartel will not see the meaning of the signed agreement and will start increasing production.
Secondly, the market may shrink to such an extent that there will be disagreement over what decision should be taken at the June meeting of OPEC. Unorganized withdrawal from the agreement may lead to higher than expected production and lower prices.
While it is unlikely that OPEC will become a “black swan” for the oil market this year. All signs – strict adherence and firm statements about the preservation of the transaction – indicate the solidarity in the ranks of the cartel at the moment.
Another threat of decline is the American slate. As was widely noted, the volume of production in the US is expected to exceed 11 million barrels a day this year (a year earlier than forecasted). It is expected that a new wave of increased production will lead to an increase in inventories that will hold prices at the bottom of the range, especially if demand is low.
This leads us to another threat. Demand is now high – the International Energy Agency forecasts an increase in demand for 1.4 million barrels per day, OPEC expects 1.6 million – which will prevent the US oil shale from falling prices. But if demand begins to decline, prices may collapse.
On the other hand, sudden disruptions in supplies (primarily from Venezuela) could be exploded by the scenario of the price range. The loss of 0.5 million barrels per day of Venezuelan oil will add about $ 3 to the price, according to the JIEP. If the reduction exceeds 1 million per day, then the price for Brent can easily exceed $ 70.
But all these are only possible scenarios of the development of events that can never be realized. Nevertheless, according to experts, the American slate and OPEC are able to hold oil this year in the range of $ 60-75.