Opec’s attempts to underpin crude oil prices are being undermined by the US oil industry. In its latest oil market report released on Wednesday, the group revised up its forecast for non-Opec supply growth in 2018 to 1.66 million barrels per day, up 280 million barrels per day from its previous forecast.
Importantly, the group sees demand growth only lifting by 1.62 million barrels per day this year, hindering attempts to help reduced global inventory levels and support crude prices.
And the US shale oil industry is largely to blame with the group estimating that US oil supply will lift 10.2 per cent this year, accounting for nearly 90 per cent of total non-Opec supply growth.
Productivity per rig is improving rapidly, something Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, says makes US production the main oversupply risk to the oil market. “Oil rig productivity looks close to setting new highs if current trends continue,” he says.
“The EIA is forecasting US oil production will lift 14.8 per cent to 10.70 million barrels per day this year, before rising another 5.3 per cent to 11.27 million barrels per day next year. The increase in output has been helped by the rapid expansion in US oil rigs… [which now sit at the] highest level since April 2015 having surged around 150 per cent since May 2016.”
And with productivity of existing wells improving, Dhar says there’s also an abundance of supply waiting in the wings. “The backlog of oil wells to be completed continues to keep rising too,” he says.
“The EIA reported that drilled but uncompleted (DUC) wells have increased to a multi-year high of 7,601 at the end of February. These DUC wells require fracking to bring oil to the market. And since these wells require less labour to bring online, they are a source of low cost production.”
