The path to higher oil prices seems pretty clear, but it isn’t inevitable.
There are plenty of reasons why the oil market is suddenly on edge, and why oil prices are at their highest level since 2014. Venezuela’s oil production is falling off of a cliff, and could fall faster now that creditors are swarming over the country. The upcoming presidential election risks a financial crackdown from the U.S. Treasury, threatening to add to the country’s woes.
The more obvious catalyst over the past week was the U.S. withdrawal from the Iran nuclear deal, putting a sizable chunk of Iranian supply at risk, although exactly how much remains to be seen.
Most importantly, the underlying fundamentals are bullish: the supply/demand balance is tighter than at any moment in recent memory, with demand expected to outpace supply for the rest of the year. Global inventories are back down to the five-year average, and falling. Because data is published on a lag, the market could overtighten before OPEC realizes it.
U.S. shale is the one factor keeping prices in check, having added more than 1 million barrels per day (mb/d) since last September. The EIA sees output growing to 11.9 mb/d in 2019 (ending the year at over 12 mb/d), up from 10.5 mb/d a month ago. In other words, the agency is baking in an additional 1.5 mb/d of extra supply over the next year and a half.
That should keep a lid on prices.
But what if all that fresh supply doesn’t actually make it online? U.S. shale production is exploding, but is also running up against serious pipeline constraints that are pushing down prices in West Texas and threaten to severely slow development. While WTI in Cushing is above $70 per barrel, oil in Midland is selling in the high-$50s per barrel.
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