WHY CRUDE WILL REMAIN CAPPED AT $60/BARREL?

By Ruma Dubey

The week began with OPEC and non-OPEC countries agreeing to a production cut to reign in the falling price of crude. As part of the deal, non-OPEC producers would scale back output by 558,000 bpd and this is over and above the 1.2 million bpd by OPEC; both will begin by January.

Soon after that news, oil analysts have been running really busy, with many predicting a price of $60/barrel by March next year. There is fear that prices will rise further and in the months to come we could see the mad days of three-figure oil prices.

Nah! Now that is something which is not going to happen. We are no oil experts but are saying this based on pure logical thinking. The hard truth is that oil price will remain capped at maximum $60/barrel, production cut or not.

The hard truth today is that oil today has a great competitor in the form of shale gas. After oil prices started falling, shale gas production came to a fall, with many halting production completely. But now many of these shale rigs, in the USA have resumed or have started taking steps to resume shale gas production as they smell the price of crude going up.

Take a look at these facts and think for yourself why we think that crude will remain capped and go on a wild run into three digits.

1: Within OPEC itself there is no eagerness to push crude oil prices above $60/barrel as they fear that doing so could spark a new glut that could drive prices down all over again.

2: Goldman Sachs has predicted that oil price will be at $55 for the first half of 2017.

3: The U.S. Energy Information Administration (EIA) has estimated that dry natural gas production would be at 29 trillion cubic feet (Tcf) in 2040, making up 69% of the 2040 total dry natural gas production.

4: As per EIA, total natural gas production was forecast to increase in January for the first time in five months to 47.5 billion cubic feet per day (bcfd),

5: Last week, the number of oil and gas rigs in USA showed an increase of 27 rigs while active oil rigs in USA increased by 21 in the week to December 9, while the number of gas rigs increased by 6. The 21-rig increase this week represents the highest spike in the number of active oil rigs in the United States since July 2015.

6: USA has been steadily bringing new rigs online since June 2016, much before OPEC could even agree on production cuts.

7: Goldman Sachs has said that with West Texas Intermediate crude at US$55, U.S. producers could be able to achieve an 800,000-bpd yearly growth in output with limited outspend of cash flow and declining leverage.

8: Production cuts globally would encourage further price increases, allowing U.S. shale drillers to ramp up output following a two-year oil rout.

9: There is also the threat of more U.S. and European supply coming to the world’s biggest market

10: Saudi’s have reportedly curtailed sales into the U.S. so that the U.S. marginal barrel stays in the country, rather than get exported and brings down the price.

Thus based on this who-will-blink-first between oil and shale gas, we can be assured that crude oil price will remain capped at $60/barrel, at least in first half of 2017.