Booming US output dents oil price recovery expectations

Large US production have forced analysts to cut their forecast on crude oil

Analysts have cut their forecasts for oil prices this year and next as the prospect of a continued large rise in US production will likely slow OPEC’s efforts to cut its output to help supply match demand, according to a Reuters poll.

Crude prices slipped to the lowest in almost a year last week as concern grew about the persistence of a three-year old surplus of oil inventories.

“Rig counts in the (US) shale basins, the metric most widely observed to gauge drilling activity and investments, have more than doubled from last year’s lows,” said Norbert Rucker, head of commodity research at Swiss bank Julius Baer.

“There is a time lag of up to six months between drilling and production and thus, the market has yet to experience the supply surge originating from the past months’ rig count increases.

Growth in US oil production should keep prices below $50 per barrel,” Norbert added.

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The survey of 36 economists and analysts predicted Brent crude would average $53.96 per barrel in 2017, down from the $55.57 per barrel forecast in the previous poll, continuing the trend of gradually lower forecasts each month this year.

US light crude was expected to average $51.92 a barrel this year, dipping from last month’s forecast of $53.52.

Analysts have cut their forecasts for 2017 every month since February this year.

Forecasts for prices in 2018 were also lowered.

“Rising U.S. production will delay the market rebalancing until the end of the year, but the OPEC production cuts should be enough to bring stocks back to their five-year average, even with an increase in U.S. output,” said Capital Economics analyst Thomas Pugh.

U.S. crude futures settled up 19 cents at $44.93 a barrel on Thursday after hitting a two-week high of $45.45 in late-morning trading.

In the week to June 23, US energy firms added oil rigs for a record 23rd week in a row, bringing the total count up to 758, the most since April 2015, according to Baker Hughes Inc .

The US Energy Information Administration (EIA) earlier this month boosted its forecast for U.S. crude oil production next year, saying it now expects output to top 10 million barrels per day, on track to reach its highest on record.

Last month, OPEC and allied non-OPEC producers agreed to extend an existing supply curb of about 1.8 million barrels per day (bpd) until March 2018.

“The nine-month extension should be enough to bring the market more into balance, provided that the rate of US production growth does begin to slow in early 2018 and compliance by both OPEC and non-OPEC participants remains strong,” said Cailin Birch, an analyst at the Economist Intelligence Unit.

“However, this will only be enough to scratch the surface of ample global stocks.

As a result, we expect the production-cut agreement to be tapered off slowly in the second half of 2018, as an abrupt return to previous OPEC production levels would flood the market once again, driving down prices.”

Rising production in Nigeria and Libya, two OPEC members that have been excluded from the supply deal, as well as the diplomatic tensions between Qatar and some of its neighbours including Saudi Arabia were among other factors that could determine the medium-term course of the oil price, analysts said.

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