Revival in US Shale Output Offsetting OPEC Cuts

West Texas Intermediate crude for March delivery closed Tuesday at its lowest level since January 19.

US shale

Oil prices fell to their lowest level in more than two weeks on Tuesday (February 7), driven down by a revival in US shale oil production. The increased output is threatening OPEC and other producers’ efforts to curb oversupply in the market.

Data from the American Petroleum Institute shows that US crude oil in storage rose by 14.2 million barrels last week, over five times the forecasted increase of 2.5 million barrels.

“The general perception is that OPEC is cutting production, which is supporting prices, but high stock levels, rising rig counts and growing U.S. production are capping gains,” Tamas Varga, an analyst at London brokerage PVM Oil Associates, told Reuters.

West Texas Intermediate crude for March delivery fell 84 cents to close Tuesday at $52.17 a barrel on the New York Mercantile Exchange; that is its lowest close since January 19. April Brent crude on London’s ICE Futures Exchange ended the day at $55.05, down 67 cents.

OPEC’s efforts challenged

Last year, members of OPEC decided to cut output for the first time in eight years. Together with several non-member countries, including Russia, the organization pledged to reduce its output by 1.8 million barrels per day in the first half of 2017.

A recent report by S&P Global Platts shows that OPEC and its partners have achieved a 91-percent compliance rate, cutting at least 1.1 million barrels per day so far.

But in response to that reduction, US shale oil output has quickly recovered. “Rig counts are increasing at an accelerating pace, and given the technological advances of the past three years, this should translate into significant supply,” Societe Generale (EPA:GLE) oil analyst Michael Wittner told Reuters.

“U.S. shale is coming back, and it’s coming back strong,” he added.

Keith Schaefer, editor and publisher of the Oil and Gas Investment Bulletin, recently made similar comments. “US producers are very efficient. They can lower and raise production incredibly quickly and their increased production will absolutely affect the bounds of the market,” he said.

For its part, OPEC appears unconcerned. “We are not worried that production in the U.S. is increasing as prices go up because I think this will be absorbed by an increase in demand,” Kuwaiti oil minister Essam Al-Marzouq, who chairs the group’s five-member ministerial compliance committee, said last month.

Gasoline weighs on oil

Gasoline prices also exerted some pressure on oil prices on Tuesday. “Gasoline is just getting slaughtered today, and it’s dragging crude with it,” Bob Yawger, director of the futures division at Mizuho Securities USA, told Bloomberg.

According to Reuters, US gasoline futures fell Tuesday, sinking 1.77 percent to reach $1.4837 a gallon. American Petroleum Institute information shows that inventories of the fuel climbed 2.9 million barrels.

“It’s a supply-driven setback … We are within 2 million barrels of the record in U.S. gasoline stocks that we saw last February,” Tony Headrick, energy markets analyst at CHS Hedging, told the news outlet. “A strong build in inventory reports could weigh on gasoline in a seasonal time frame where gasoline demand is weak,” he added.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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