The latest official Drilling Productivity Report confirms that US oil output is on track to surpass the record highs next year. We see oil trending sideways, spending more time in the high 40s than the low 50s, in part because the shale revival and stagnant western-world oil demand undermine the Middle East’s restriction efforts, writes Norbert Rücker, Head Macro & Commodity Research, Julius Baer
Oil prices have stabilised following the slide below $50 per barrel in early June. Scepticism prevails that the market’s surplus might persist for longer and question marks are put on the effectiveness of the Middle East’s supply deal. Specifically, the shale revival and stagnant western-world oil demand undermine these restriction efforts. In consequence, yesterday’s release of the June Drilling Productivity Report published by the US Energy Information Administration garnered attention.
The report is the leading source for insights into the shale revival and projects output from shale wells to continue to grow strongly into the foreseeable future. That said, production estimates for the Permian basin, the current shale boom hotspot, have been revised lower largely because producers drill more wells than they are able to complete and the backlog of wells unexpectedly increased. Anecdotal evidence suggests that completion, i.e. the so-called fracking services are in short supply and that costs have correspondingly increased. However, US oil production is set to exceed 10 million barrels per day next year, surpassing the record set in the early 1970s. The shale drilling frenzy has to cool eventually to prevent an increasing global market surplus and the signal for this is given by today’s prices trading in the high 40s. We stick to our neutral view and see oil prices trading sideways, spending more time in the high 40s than the low 50s.