Key Points:
- Crude oil (WTI) prices fall below November low
- Shale oil gaining in technological advantage
- Watch for continued downward pressure as crude oil markets continue to rebalance
The price of crude oil (WTI) has continued to crumple overnight as the benchmark declined around 2.03% and is now trading around the $42.53 a barrel mark. However, as much as OPEC might like to point the finger at non-cartel members undermining the current production agreement, the reality is that technological advances are the key factors at play.
The fact is the world is currently drowning in crude oil supplies and ongoing technological advances in the fracking industry are leading to significant increases in global productive capacity. Additionally, the gains in supply are coming right at a time when demand is less than robust and has remained relatively flat over the past few years. This subsequently provides the perfect environment for declining crude oil prices.
In fact, the International Energy Agency (IEA) recently released their statistics for May which showed a global gain of around 585,000 barrels a day in supply to 96.69 million B/PD. Subsequently, there had been incremental increases in the supply volume and marginal extraction cost throughout most of 2016 and 2017. Most of the gains are coming from Non-OPEC shale producers with the U.S. leading the charge in additional production. Subsequently, the current U.S. shale productive capacity (excluding Texas and North Dakota) has risen to around the 9.3 million barrel mark.
Therefore, OPEC faces plenty of competition from non-producers, at an increasingly lower marginal extraction cost, which suggests that their ability to hold back the tide via production cuts is diminishing daily. The reality is that the market is in the process of arranging a new structure, or crude oil order, around the additional supply and this can only see OPEC’s power over the long term decline.
Subsequently, whilst the cartel is primarily focused upon attempting to control market prices through supply caps, the rest of the world is instead focused on productivity gains and finding easier and cheaper ways to extract the black gold. So it would seem counter-intuitive to suggest that we are likely to see any form of long term upward pressure on crude prices until a full rebalancing of the market occurs. In fact, ongoing supply cuts simply lengthen out the rebalancing process and prolong the pain which is yet to really come.
Ultimately, OPEC, as a cartel, is facing its toughest challenge yet of its long reign as the sovereign of oil markets. Subsequently, lower crude oil prices are here to stay, at least in the medium term, and we may just see WTI back below the $40.00 handle in due course until a complete rebalancing of the fungible market completes.