Rebound in US shale will limit oil price recovery
It has been one of the less widely noticed oil price surges. Since January, benchmark Brent crude has risen from less than $47 per barrel to more than $65 per barrel, an increase of about 40 per cent.
The rise has reversed less than a third of the plunge in oil from its peak above $115 per barrel last summer, but there have already been signs that the increase is starting to unsettle debt and equity markets.
While the rebound in oil has been rapid, though, there are good reasons to expect that it will not continue for much longer. The shale oil industry of the US is emerging as the world’s “swing producer”, bringing more crude on to the market when prices rise, and putting a ceiling on its potential price — that will probably now be well below $100 per barrel.
Producers that rely on higher prices, whether companies looking for returns on their investments or countries trying to balance their budgets, are likely to discover that their lives become increasingly difficult.
The rebound in oil this year has been driven by a slump in drilling in the US, raising the prospect of a drop-off in production. Added to signs that demand growth is picking up, especially in China, and disruption to Libya’s exports, it has raised expectations that the market will tighten.
Some analysts argue that the price increase has been premature, and that there is still a global oversupply of crude that will drive prices back down again before long.
Regardless of whether they are right, however, there is a more fundamental reason why we can expect the rise in oil prices to be limited: that drilling activity in the US is likely to be picking up again soon. The prospect that renewed production growth in the US would limit any oil price recovery has been talked about in hypothetical terms for some time, but in the past week we have seen evidence that it is becoming a reality.
In a round of earnings statements last week, some of the leading companies in the US shale oil industry, which have cut their drilling activity sharply since last summer, started talking about stepping it back up again. Harold Hamm, chief executive of Continental Resources, one of the leading operators in the Bakken formation of North Dakota, said: “$70 is the price that turns it on for us.”