Oil prices head for a higher range

Last year, oil prices averaged $44 a barrel. Now Brent crude has crept up to $60 for the first time in two years, double the price seen in the spring of 2016. And the “fundamentals continue to favour the bulls”, Tom Essaye of the Sevens Report told MarketWatch.

On the demand side, signs that global growth is strengthening have given the bulls confidence. Opec, the oil exporters’ cartel, has just nudged up its demand forecast for 2018, while the International Energy Agency estimates that global demand is climbing by 1.6 million barrels per day this year, almost double the amount in 2011-2014, when oil was at $100 a barrel.

As far as supply is concerned, a deal between Opec and major non-Opec suppliers such as Russia to cut output, designed to mop up a global glut, now looks set to be extended beyond the originally planned expiry date of March 2018. Indeed, the Saudi crown prince has said he wants the deal to continue until the market has come back into balance.

Meanwhile, oil exports from the Kurdish region have been interrupted, and there has been talk of new US sanctions on Iran constraining production there. A slowdown in US drilling has also contributed to price rises. The number of active US oil rigs slipped for a third successive week in late October. 

So far so bullish, but there seems little scope for oil to rise all that much further. The key change in recent years has been the advent of US shale oil. As a result, America now accounts for 14% of global oil production, says Liam Halligan in The Sunday Telegraph – as much as Opec’s swing producer Saudi Arabia.

Shale-drilling costs have fallen as technology has improved, and producers can rapidly hop back into the market once prices rise. And while shale output may have slowed recently, it hasn’t peaked. It is set to climb for the 11th straight month in November, says Sara Sjolin on MarketWatch.

Shale output has capped oil prices in recent years, keeping oil in a range of $40-$60. Strong demand may well keep oil above the $60 mark for some time, but US production will still result in a small market surplus next year, reckons Capital Economics, while US sanctions against Iran look unlikely. With shale still preventing oil prices from taking off, Brent may now simply settle into a slightly higher range.  

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