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US Shale Surge Shakes Oil Price

Global oil prices have dipped closer to $US50 a barrel as investors and many experts awake to the growing danger from the rebounding US shale sector.

US production topped 9.2 million barrels a day last week for the second time in more than a year at 9.25 million barrels (after 9.235 million barrels the week before). That’s 273,000 barrels a day more than a year ago.

And while US stocks dipped 1 million barrels last week (after a 22 million dip the week before), they still stand at close to all time highs at around 533 million barrels.

And it was unexpected large rises in stocks of petroleum products last week that helped spook the market down by $US2 a barrel and the closest it has been to $US50 a barrel for some weeks.

This added to the news prior to Easter that the US oil rig count had risen to its highest level in two years, threatening the rebalancing of global supply and demand.

The weekly rig report from services firm Baker Hughes revealed that drillers added 11 oil rigs in the week to April 13, bringing the total count up to 683.

The number of US rigs has increased for 13 consecutive weeks and the total number of rigs is more than 90% above the figure for a year ago.

Baker Hughes’ oil rig count dropped from a record 1,609 in October 2014 to a six-year low of 316 in May 2016 as US crude prices plunged from over $US107 a barrel in June 2014 to near $US26 in February of last year.

The Paris-based International Energy Agency (IEA) said on Thursday that supply and demand in the global oil market were close to balance after a fall in stockpiles in developed countries in March.

The IEA said oil stocks in the Organisation for Economic Cooperation and Development industrialized countries fell by 17.2 million barrels in March, although inventories were still 300 million barrels above the five-year average.

"It can be argued confidently that the market is already very close to balance," the agency said in its monthly report. But the IEA cut its oil demand growth forecast for 2017 by 40,000 barrels per day and warned that its revised level of 1.3 million barrels per day “could prove optimistic.”

It warned that even though the oil market is likely to tighten throughout the year, “overall non-OPEC production, not just in the U.S., will soon be on the rise again.”

“Even after taking into account production-cut pledges from the eleven non-OPEC countries, unplanned outages in Canada as well as in the North Sea, we expect production will grow again on a year-on-year basis by May,” it said.

The IEA sees global growth of 485,000 barrels a day in output this year, compared with a decline of 790,000 barrels a day in 2016. “The main impetus comes from the U.S.,” it said.

And while an output-cut extension from OPEC “would provide further support to prices,” that, in turn, “would offer further encouragement to the U.S. shale oil sector and other producers

And the Energy Information Administration (EIA) sees US crude production next year rising to 9.9 million barrels a day. That would be the highest annual daily output figure on record, and up 700,000 barrels a day from the current level. And the EIA said on Monday of this week that much of the current surge in US production is coming from the productive Permian Basins of southern USA.

The EIA forecast that production from the seven major US oil shale areas will rise by a forecast 124,000 barrels a day to 5.193 million barrels a day in May from this month.

The EIA said in its monthly drilling productivity report that output from the Permian Basin, which covers parts of western Texas and southeastern New Mexico, is expected to see the largest climb among the big shale zones, with an increase of 76,000 barrels a day.

That will add to the headaches rising US oil output is already causing for the OPEC and big independents attempts to cap non US output.

In fact rising tide of production from the US is now threatening the price gains brought by the OPEC agreement to cut output in the first six months of 2017.

OPEC meets on May 25 to consider extending the cuts beyond June. Saudi Arabia, Kuwait and most other OPEC members are reported to be leaning towards extending the cap if agreement is reached with other producers.

OPEC data showed members of the group had cut March output beyond the level they had promised.

But outside the US oil companies are far less enthusiastic about stepping up production.Bank of America-Merrill Lynch pointed out earlier this month that along with the collapse in spending, the global rig count, a measure of production activity, shows no sign of picking up outside the United States.

Baker Hughes says that the number of non-US oil rigs has risen by just 29 since hitting an 11-year low of 666 in November last year, compared with a rise of 358 in US in the same time. Big falls have been reported in the oil sands areas of Canada and the heavy oil zone of Venezuela.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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