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Crude Oil Prices: Potentially Bearish Factors

On November 30, the OPEC countries  sand Russia achieved an agreement to curb crude oil production in order to support crude oil prices. The decision was considered, bold, but not unexpected after the prices of crude plummeted from above $100 down to $25 a barrel. The major goal of the parties was to reduce the existing stock and drive the oil prices in the higher territory. As recently reported by the panel of OPEC officials, overseeing the execution of the treaty, the oil production is being reduced according to the plan, and will influence influence oil exports from the member countries as early as next month.

While the supply of oil from OPEC countries and Russia is being reduced and the price of crude settles into the territory above $50 a barrel, additional factors go into play that can stop or substantially slow down the future price growth.

Rise of oil production by the United States may visibly add to the global crude oil supply. As oil production is slowing down in the Middle East, the price of oil exports from the region is growing, which makes US oil from Gulf of Mexico competitively priced, increasing the exports from US to Europe and Asia. Bloomberg reports:

Cargoes of the two varieties produced in the Gulf of Mexico, which are heavier and more sulfurous than supply from U.S. shale fields, are poised to flow into Asia as they turn cheaper relative to similar-quality crudes from nations such as Saudi Arabia and Oman.

The deal between producers worldwide to cut output and ease a glut is boosting the cost of Middle East supplies, priced against the Dubai benchmark, because most of the reductions are coming from the region. Meanwhile, U.S. marker West Texas Intermediate is turning relatively weaker as a rebound in global crude oil prices from the worst crash in a generation is spurring more American rigs into action. Shale oil that was already cheap enough to sail to Asia is now being joined by cargoes from more traditional fields.

Asia is buying oil from as far away as the U.S. because of a shortage of supplies of medium-heavy crudes …

Such shipments from the Americas as well as Europe and Africa are making oil sales to Asia more competitive. It’s also influencing the strategy of traditional dominant suppliers such as Saudi Arabia. In January, the largest oil exporter was focusing its output curbs on its Arab Medium and Arab Heavy grades while continuing to pump lighter crudes to compete better with U.S. shale and African supply. (Read the full article)

New drilling projects also picks up pace in Canada as oil settles above $50. The diagram below shows the projected number of new wells, that is expected to rise in 2017. (Courtesy of Bloomberg, read the full article)

 

Crude oil prices - Projected growth of new drilling in Canada
Projected growth of new drilling projects in Canada

 

At the same time the oil production technology becomes more efficient, partially due to progress in automation, reducing the need for manpower, and bringing lower the cost of production.

Automation … has revolutionized many industries, from auto manufacturing to food and clothing makers. Energy companies, which rely on large, complex equipment for drilling and maintaining oil wells, are particularly well-positioned to benefit …

It used to be you had a toolbox full of wrenches and tubing benders,” says Donald McLain, chairman of the industrial-programs department at Victoria College in south Texas. “Now your main tool is a laptop.”  …

During the boom, companies were too busy pumping oil and gas to worry about head count … The two-and-a-half-year downturn gave executives time to rethink the mix of human labor and automated machinery in the oil fields …

Rigs have gotten so much more efficient that the shale industry can use about half as many as it did at the height of the boom in 2014 to suck the same amount of oil out of the ground, says Angie Sedita, an analyst at UBS Corp. Nabors Industries, the world’s largest onshore driller, says it expects to cut the number of workers at each well site eventually to about five from 20 by deploying more automated drilling rigs. (Read the full article)

 

See also:

Can US Oil Imports from OPEC be Stopped?

Oil Production Cuts by OPEC Proceed as Planned

New Projects May Increase Global Oil Production

 

Sources:

OPEC Clears Way for Cheap U.S. Oil to Sail to Biggest Market

Canadian Drillers Brave Deep Freeze as Oil Patch Revives

Robots Are Taking Over Oil Rigs