Shale output could hold the key to future oil prices
Between July 2017 and January 2018 the price of Brent Crude went up from $45/bbl to $70/bbl. While the price has toned down to $64/bbl, oil analysts are betting on oil prices staying elevated till the year 2020. Here is why!
Supply cuts to continue
The big disruption in the demand supply equation began when the OPEC and Russia decided to jointly cut supply of crude by 1.8 million bpd. This changed the crude oil equation in favor of demand and supply has failed to keep pace. OPEC and Russia look set to carry this supply through this year and that will hold oil prices up. Also, there is the multi-billion dollar Saudi Aramco IPO that is expected within a year and that IPO’s success will largely predicate on the back of buoyant oil prices. Hence it is very likely that oil may continue its up-move, despite bouts of volatility!
Will Shale supply come in?
When the crude oil prices started cracking in late 2014, the big reason was the virtually incessant supply of shale oil from the US. Three things have changed since then. Firstly, US shale companies have realized that they also need a basic minimum price to run a sustainable model. Secondly, the US has been rapidly drawing down on inventories and lower inventories are a key indicator that holds oil prices down. Last, but not the least, borrowing costs in the US has gone up due to rising bond yields. The old model of borrowing at near-zero rates of interest to expand shale capacity is no longer possible. The Fed move to hike rates and the rise in bond yields has changed the equation. That explains why shale output is not flooding the market any longer. It looks very likely that the price of crude may stay elevated from here on! ©