Less reliance on foreign oil, U.S. shale production helping to stabilize pricing
The news out of the Middle East on Thursday that the Organization of Petroleum Exporting Countries (OPEC) would continue recent production cuts in an effort to boost oil prices may have upset some oil traders, but it shouldn’t have much effect on diesel fuel prices at the pumps.
With oil floating in the low $50 a barrel range, OPEC’s announced extension of oil production cuts for another nine months was expected. Oil traders, though, were hoping for deeper or longer cuts in production and they reacted by driving down the price of a barrel of oil below $50 on the New York Mercantile Exchange. According to a story on MarketWatch, traders were not happy with the status quo.
“The market is sending a signal that they were looking from more out of the [OPEC] meeting, maybe a 12-month extension,” Phil Flynn, senior market analyst at Price Futures Group in Chicago, told MarketWatch.
Saudi Arabia oil minister Khalid al-Falih said “more time is needed” for the oil markets to recover following the decision by OPEC and non-OPEC countries last November to cut production by 1.8 million barrels a day.
The cut was instituted to help offset a glut of oil on the global market, much of it as the U.S. has ramped up shale oil production. However, since the production cuts were announced, crude supplies have started to fall in the U.S., driving down overall inventories.
“[It] may have helped convince some OPEC members that supply cuts have had a delayed impact and should be given more time to accomplish the goal of draining crude stocks to levels around the five-year average,” Geoffrey Craig, oil futures editor at S&P Global Platts, wrote in a research note.
The impact on diesel fuel prices in this country, though, should be minimal, Denton Cinquegrana, chief oil analyst with the Oil Price Information Service, told FreightWaves.
“I don’t think there will be a major impact one way or the other,” he says. “The U.S. has been producing 9.3 million barrels a day, so I don’t think this means we’re now on our way to $70 or more for a barrel of crude.”
With stable crude oil prices, trucking fleets should expect to see less volatility in diesel fuel prices. Last week, the average cost of diesel in the U.S. was $2.53 a gallon. According to the U.S. Energy Information Agency, crude oil futures prices for June delivery are trading at about their current level, so no spike is expected.
There are, of course, always outside factors that can change demand, including politically instability. Another is the summer driving months. Jason Schenker, in an opinion article for Bloomberg Views yesterday, noted the impact U.S. drivers can have on oil demand.
“The U.S. summer driving season is likely to be the biggest in history in terms of gasoline demand,” he writes. “The driving season is already the biggest seasonal source of global oil demand growth in the world, and with the 12-month moving average of total miles driven up by 1 percent year-over-year through March - and U.S. unemployment at the lowest level in almost a decade - there’s ample reasons to be bullish about U.S. summer driving.”
Cinquegrana says that production increases in the U.S. and Canada have created less dependency on Middle East oil, which have resulted in a more stable retail pricing environment.
U.S. shale production has recently kicked into high gear and is now at levels last seen in November 2014 when Saudi Arabia boosted oil production in an effort to drive out producers saddled with higher production costs, including the U.S. fracking industry.
That strategy had a short-term effect, but the U.S. industry rebounded and Canadian tar sands and deepwater fields in the Gulf of Mexico are adding to the production growth, according to World Politics Review.
Cinquegrana says it’s not just the U.S. and Canada that are keeping prices lower, but increased production from areas such as Iran, which had been barred from selling oil because of sanctions that were lifted in 2015, and lower demand in other world markets.
“The market really tanked last year,” he says, “but the expectation was higher prices this year. They could drift a little higher, maybe $55 a barrel, but there are likely no big spikes [on the horizon].”
Crude oil has been traded in the low $50 range for a while now, which is where it was in November when OPEC first announced the production cuts.
“Six months ago, [OPEC’s] own analysts were forecasting that U.S. oil production would contract in 2017 by 155,000 barrels a day,” according to the World Politics Review story. “That, they claimed, would give OPEC space to bolster oil prices without conceding too much of the market. Today, those same analysts are forecasting that output from shale plays like the Bakken field in North Dakota, Eagle Ford in Texas and, especially, the Permian basin in Texas and New Mexico will grow by 824,000 barrels per day this year—an upward revision of nearly 1 million barrels per day. On top of that, projections for oil demand have decreased by some 500,000 barrels per day since OPEC’s cuts began.”
The oil crash in 2014 actually has helped U.S. producers, who have used technological advances to improve their efficiency.
“U.S. shale drillers have shown that they can compete in a world of $50 per barrel oil,” the World Politics Review article stated. “Several producers have used the price spike triggered by OPEC earlier this year to lock in revenues for 2017 and 2018. With their financial future relatively secure, they started deploying rigs. Across the entire shale industry, costs have fallen thanks largely to technological innovation and efficiency.
“The worst news for OPEC may be that a whole new wave of U.S. shale oil will hit markets in a few months,” the article added. “Drilling activity in America’s shale industry is increasing even faster than it did in the final stages of the first boom, up until 2014. That surge will surely test the resolve of OPEC, Russia and other producers to continue their cuts, especially if they lose market share to shale.”