Oil bulls gained a sense of hope, and trumpeted it loudly across the marketplace last week with the first drop in US crude production in months, and the return of WTI to territory over $50.
The resulting price surge was inevitable given the production fall and Saudi Arabia’s crowing over their agreement with Russia. However, their triumph could be short-lived. The fall in US crude was a result of a decline in Alaskan crude supply rather than a decline in the overall US rig count which for the 18th week in a row rose. The new total for rigs operating in the US is 712, which is more than double the previous year’s total.
This latest rally in oil is a response to the tough talk of Saudi Arabia and Russia. This time is over. It is true the US shale revolution will never be able produce enough oil in order to meet the world’s needs. However, what US shale can produce is being created at historically low prices due to the attempt by Saudi Arabia to strangle the shale revolution in it’s infancy. Shale survived and those who survived with it learned how to produce oil at levels which are competitive with Saudi Arabia and Russia.
This trial by fire put an honest player into the game. Further, with production levels estimated to hit 10 million barrels a day in 2018 this player is to big too be marginalized or ignored. With a large proportion of US crude production having been sold in advance US shale players now have the financial stability to ensure a long term future, regardless of market fluctuations. What a future that will be, as the price of oil going forward may be dictated by things like “supply and demand” and “cost of production” rather than the Geo-political desires of producers.
