WTI suffered its steepest one-day fall in 13 months on Wednesday and is now trading below $50. EIA report of record build in US inventories triggered the plunge. Rising shale oil production has been keeping a lid on oil prices despite record production cut compliance by OPEC members.
Now what? Will the negative price movement sustain or was this decline just a temporary blip? There remains a possibility that the supply glut woes could intensify and threaten oil prices going forward:
1) US oil production could continue despite lower prices
The price rise following the OPEC deal has been supportive of Shale oil production.But even if oil prices slide, increasing efficiency is allowing the producers to operate with relatively lower breakevens than in the past. Also, given that many producers might have contracted the high prices for 2017/18, their current production plans will remain on track despite the slide. Trump policies favouring energy independence might also support shale production
2) OPEC producers might not extend the deal as members strive to defend market share
Recent comments from Saudi officials have been conveying the growing reluctance among OPEC members to continue with production cuts post the six-month arrangement
3) Global demand may not pick up as expected
The IEA recently revised up global oil demand growth estimates citing pickup in global economic activity. But headwinds to growth remain, be it China’s debt issues, Eurozone’s political or US’s policy uncertainty, making the overall demand outlook for oil a bit shaky.