Brent crude oil prices hit their peak in 2019, reaching 65 USD per barrel on Friday, backed by the OPEC+ quota deal and partial closure of Saudi Arabia’s largest coastal oil field.
The price of Brent oil reached 65.10 USD per barrel, surpassing the 65 USD threshold for the first time this year, but after that suffered some correction and slid just below to 64.86 USD per barrel. The international Brent oil is heading to growth this week by 4.5%.
Futures on US crude oil WTI rose by 0.21 USD, or 0.39%, to 54.62 USD per barrel.
According to traders, crude oil prices have been backed by the partial closure of the Safaniya oil field – the largest offshore oilfield with a production capacity of over 1 million barrels per day.
The closure occurred earlier in the week and it is not clear yet when it will return to work at full capacity.
Partial closure occurs amid a voluntary reduction in oil yield from the Organization of Petroleum Exporting Countries (OPEC). The deal aims to tighten the market and balance it.
OPEC and its allies, including Russia, agreed at the end of last year to cut its yield by a total of 1.2 million barrels per day. Top exporter Saudi Arabia has promised to shrink its production even more in March.
“The Brent oil should reach an average of 70 USD per barrel in 2019, backed by volunteers (Saudi Arabia, Kuwait, UAE) and unintentional (Venezuela, Iran) drops in oil supply”, said Bank of America Merrill Lynch in a comment.
The bank also expects a 2.5 million barrel per day drop in OPEC supply from the fourth quarter of 2018 to the fourth quarter of 2019.
Despite the bullish market on Friday, there are signs of a slowdown in demand. The maintenance season has finally begun this week, and the operations of US refineries has fallen by 480 basis points on a weekly basis to 85.9%.
The slowdown in the global economic growth is also a cause for concern, with delays being reported in Europe, Asia, and the United States.
At the same time, the rising US production may also undermine OPEC’s efforts to tighten the market.
Analysis of US oil production
The rise of US shale oil production over the last few years has led to a change in the global oil market, and the United States has begun to challenge the role of the Organization of Petroleum Exporting Countries (OPEC) in terms of price regulation. This change has created the impression that oil prices will remain forever balanced as any leap in oil value is offset by an increase in US shale production.
US oil supplies have increased from nearly 500,000 barrels per day in 2010 to just under 6 million barrels per day in 2018.
Following the oil crash at the end of 2014, the growth of US light crude oil experienced a brief pause in the period 2015-2016 before it resumed even faster, reaching levels last year.
The new record levels are impressive, especially since the average price of West Texas Intermediate (WTI) variety in 2018 was 65 USD per barrel, compared to 95 USD per barrel in 2012-2014.
Most market observers attribute this strong performance to shale fuel to improved drilling technology and practices.
But a deeper study of the data reveals a different picture.
The appearance of the US oil industry, which overcame the price collapse in 2014 through innovation and better efficiency, is the product of uniting different oil pools.
In order to understand correctly the impact of the price collapse of nearly 5 years ago, attention should be paid to shale basins, operational activity there before and after the price crisis.
Bakken and Eagle Ford oil basins are a perfect example. These are actually the oldest oil pools in the US, the first one being developed in 2007, and the second one started in 2010.
Exploring the productivity of these pools in 2014-2018 provides important information on the sustainability of US shale production under conditions of low oil prices.
Production in Bakken and Eagle Ford is growing at a phenomenal pace between 2010 and 2014.
The drilling activity at Eagle Ford for the period managed to reach a production level of 1.3 million barrels per day until 2014, while Bakken increased to 1.08 million barrels from 190,000 barrels in 2010.
After the fall in prices at the end of 2014, production growth in these two pools continued for another year, albeit at a slower pace. There was a decrease that ended in 2016.
In the months before the price crisis, the oil production in Bakken and Eagle Ford grew each year by 600,000 barrels per day and 700,000 barrels respectively.
The stabilization comes in 2017, with the combined annual growth rate reaching 210,000 barrels, which is 70% less than the combined growth rates before the price collapse.
The poor performance in these two areas over the past few years has outlined a different picture of the sustainability of US oil production under low-priced conditions.
Significant manufacturing downturns in 2014-2015 discredit the “technological development” of drilling and its efficiency, perceived as the main pillar of the power of the shale industry.
Looking at other pools, you will see a similar trend.