The latest oil rally, which sees crude trading at close to its highest point in three years, is sufficient to garner considerable attention from market pundits, industry insiders and investors alike. It has raised the ugly specter of a sharp uptick in U.S. oil production driven by the much-anticipated shale oil boom.
Yet, there are signs that the potential for U.S. shale oil companies to rapidly expand production and return to the boom years witnessed before the prolonged oil slump appears overblown.
There are a range of constraints poised to prevent the rapid production growth many mainstream analysts had been predicting.
It was only in early December last year that an MIT study was released concluding that the U.S. vastly overstates oil production forecasts and that the EIA has been exaggerating the effect of fracking technology on well productivity.
According to MIT research, the EIA assumes that regular improvements in drilling technology and well design are boosting output at new wells by around 10 percent, yet their own research shows that it is closer to 6.5 percent. That, along with the EIA’s own monthly production data, which shows that U.S. oil output between January and November 2017 grew at a far more modest monthly average of 1.3 percent, indicates that the EIA’s weekly forecasts could very well be overstating U.S. oil production.
In the past, the optimistic figures provided by the EIA have suppressed the price of West Texas Intermediate or WTI, and this in part has been one of the contributing factors to the significant premium that has existed between WTI and Brent.
Nevertheless, that premium is closing, having fallen from over $6 per barrel at the start of 2018 to less than $4 for the last week of January 2018 amid falling U.S. inventories.
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