Oil experts tend to blame growing crude production from countries that aren’t bound by the OPEC-led production cut agreement for the ongoing glut in global supplies, but that isn’t the whole story.
Oil producers in the Organization of the Petroleum Exporting Countries continue to “put a lid on their output in an effort to prop up prices,” but the price for a barrel of Brent crude LCOQ7, +1.18% was just below $45 in Wednesday dealings— “comfortably in the $40-$50 price range that I have been expecting for this year,” said Ed Yardeni, president and chief investment strategist at Yardeni Research, in blog post Wednesday.
Brent crude, as well as West Texas Intermediate crude CLQ7, +0.78% has fallen by more than 21% year to date.
Yardeni titled his blog post, “Drowning in Oil” — suggesting that advances in technology have contributed to higher production rates in the U.S. as demand world-wide may increasingly suffer from the use of alternative energy sources like solar.
A report from International Energy Agency released in mid-June showed that global oil supply rose by 585,000 barrels per day in May to 96.69 million barrels a day. That was 1.25 million barrels a day above a year earlier — the highest annual increase since February 2016, the IEA said.
Non-OPEC output, particularly in the U.S., dominated the rise, it said.
In his blog, Yardeni pointed out that despite a plunge in prices, U.S. crude production fell “just” 12% from the week of June 5, 2015, through the week of July 1, 2016, with weekly output better in Texas and North Dakota than the rest of the country.
Since then, it has climbed 10% to 9.3 million barrels a day with oil production, instead, led by the rest of the country, excluding Texas and North Dakota.
“Could it be that frackers figured out how to lower their costs in two states where they’ve been most active, and taken their innovations to other states?” Yardeni asked. “Maybe.”
“The frackers are using every frick in their book to reduce the cost of pumping more crude oil,” he said. “Rather than propping up the price, maybe OPEC should sell as much of their oil as they can at lowest prices to slow down the pace of technological innovation that may eventually put them out of business.”
Meanwhile, major oil producers with large crude reserves such as Saudi Arabia, Russia and Iran, should be “awfully worried that they are sitting on a commodity” that may be much less needed in the figure, said Yardeni.
“As long as the sun will come out tomorrow (as little orphan Annie predicted), solar energy is likely to get increasingly cheaper and fuel a growing fleet of electric passenger cars,” he said.