Rising US output, shale oil boom put OPEC in a tight spot

The mood in the global energy market is not exactly upbeat. Rapidly rising supply growth in the US following boom in shale oil production is heavily weighing on the sentiment. Indeed, it is pressuring crude oil market down.

Despite positive demand growth signals and appetite for consumption, Brent is still trading below $65 a barrel and WTI at around $61.

Rising stocks

It is estimated that the amount of crude oil in commercial storage in the US increased by about five million barrels to 430.9 million barrels earlier this month.

The gain in crude stocks was mainly driven by strong production, which has been expanding in recent weeks.

Indeed, stocks rose despite a jump in inputs to refineries. Despite the fact that rising inventories are partly a seasonal phenomenon, growing US output will mean stocks too will keep building.

Interestingly, the oil cartel still expects that the market will be in deficit this year. However, market fundamentals of supply, demand and stocks suggest otherwise.

In fact, the market may end the year in a small surplus or in any case stay very close to balance.

Bearish funds

Given this scenario, no wonder, hedge funds have begun to short oil again. Of late, hedge funds and other money managers have started to lay bearish bets on oil futures.

In other words, speculators are not convinced that oil prices will hold at current levels.

Indeed, the extant market conditions and outlook for the coming months have put the production cut agreement among OPEC members and others in near jeopardy. In the upcoming June meeting, a possible exit from production cuts next year may be discussed.

IEA’s projections

Meanwhile, in its latest report, the International Energy Agency has said that oil demand growth in the next five years rests on solid outlook for the global economy.

It expects demand to grow at an average annual rate of 1.2 million barrels a day. By 2023, oil demand will reach 104.7 mbpd, up 6.9 mbpd from 2018.

The report goes on to add that while the rate of oil demand growth in China may slow down over next five years, India will face a slight pick-up in oil demand growth.

IEA believes the oil market is likely to tighten by 2023 with increased risk of price volatility.

But by 2023, if investment remains insufficient, the effective global spare capacity cushion falls to only 2.2 per cent of demand, the lowest number since 2007.

This raises the possibility of oil prices becoming more volatile until new supplies come on line, the IEA has cautioned.

The writer is a agri-commodities market specialist. Views are personal.

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