Lessons learned from two years of overproduction have led most producing nations to the cold reality that outproducing competitors leads to ruin. While oil extraction technologies were advanced by several years of $100+ a barrel oil and put an end to the traditional belief of peak oil, the sudden and dramatic pull back in capital expenditures (capex) aimed at securing new discoveries for depleted reserves, appears to be helping the world return to balance earlier than thought.
Apart from OPEC’s 1.6 million barrel a day reduction in output (along with 11 other non OPEC nations), the U.S. Department of Energy is optimistic that increased global consumption of gasoline later next year will push oil to a position of balance by year’s end. “Global production and consumption are both projected to increase through 2018, but consumption is expected to increase at a faster rate than production.As a result, global balances are expected to tighten” according to the EIA’s (Energy Information Agency) weekly report.
Specifically, the EIA’s assumptions about draw-downs in balances is based on the premise that while total world consumption for petroleum and liquids will be 98.9 million barrels a day, production will fall below that number or statistically tie that need by mid 2018. Indeed global inventories in crude are expected to fall behind demand by 100,000 barrels a day beginning in the second half of 2018, with noticeable draw downs thereafter.
Until then, oil will continue to remain at a restrained value of a little less than $60 a barrel, but then jump into the mid sixties range by the end of that year.
Interestingly the report does not consider or delve into the effect of rising U.S. and Canadian rig counts and there role in raising total global oil numbers. In the absence of this omission, there seems to be a growing belief that the increase in US and Canadian output will not match decreases by OPEC and NOPEC nation producers.
As such next year appears to offer a more stable outlook for oil and other liquids as demand continues to rise and outpace production.