CHART OF THE WEEK
Almost six months after the meeting where OPEC and Russia agreed to cut their combined output by 1.8 million barrels per day, oil prices have dipped back below the USD 50 threshold. Although the agreement between OPEC and Russia has been complied with and their output levels have indeed fallen, US output has increased and is now close to highs last seen in mid-2015. Persistently high inventory levels are also dragging on prices. In response, OPEC recently announced that it may extend the output cuts, possibly to 2018.
OUR ANALYSIS
In the short-term, the markets are waiting for the May 25th OPEC meeting when an extension to the output cuts should be announced. The possibility of deeper cuts to production has also been mentioned.
In the medium term, the IEA is predicting that market conditions should balance out during 2017, but the recent fall in oil prices confirms that shale output is effectively setting a price ceiling.
Productivity gains combined with cost cutting have enabled shale producers to lower their breakeven prices. The active drilling rig count in the US has been on the rise since mid-2016. Oil prices jumped after the OPEC agreement and It would appear that US producers took advantage by locking in those higher levels, leaving them less exposed to any short-term price falls. For these reasons, a significant recovery in oil prices seems unlikely.
The opinion expressed above is dated May 9th, 2017, and is liable to change.
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