Oil prices have tanked in recent weeks, driven largely by fears of growing US output and weaker global demand.
Both of these factors are legitimate concerns that dent the bullish argument, but they are far from enough to warrant such a decline in price.
In addition to Venezuela and Iran adding to the bullish case, you have the fact that OPEC would be wise (and seems committed) to cut further.
This is the new paradigm in the oil markets and investors who see prices south of $60 per barrel would be wise to consider jumping in long.
The past several days (and really the past month or so) for oil bulls has been excruciatingly painful. This pain only compounded when, on November 13, WTI crude prices plummeted more than 7% to close at $55.69 per barrel. This is actually the lowest price point for oil since November 2017 and has been driven by fears regarding robust US production, a lack of an impact related to sanctions, and faltering demand growth. Surely, this is a painful time, and at times like this, when there’s blood in the streets, investors come to worry that the worst is just around the corner, but that appears unlikely. While prices can and will be volatile in the near term, the vast majority of data points to a world where global oil markets should end up fine from a bull’s perspective.
To be fair, there are concerns globally about output outside of OPEC and some non-OPEC nations growing, but the real concern is always the US, which is and will remain the new marginal producer of sorts. In a recent weekly filing, the EIA (Energy Information Administration), for instance, revealed that new data forced it to increase its estimate on what daily output had been each week. This revision higher amounted to 415,000 barrels per day, pushing daily output for the week ending November 2, up to 11.60 million barrels per day. Monthly data has been even scarier in a sense, with the EIA estimating that production for the month of August climbing to 11.346 million barrels per day. This was up 0.416 million barrels per day compared to July’s figures, which in turn was up 0.258 million barrels per day from June.
With growth like that, especially during a period where some capacity constraints in the Permian Basin widened differentials considerably and brought to doubt the ability of firms to transport all the crude extracted (leading to worries that production growth might slow), there are legitimate concerns about the future path that output will take. For instance, in its latest Short-Term Energy Outlook, the EIA said that fourth quarter oil production will average 11.57 million barrels per day, up from 11.24 million barrels per day in the third quarter of this year. Seeing as how at the start of November we already are at or above that level, and if the current trend for material production growth month-to-month persists, it wouldn’t be unreasonable to anticipate the EIA’s current estimate to be off.
For 2018, given how close we are to the end of the year, this may not matter a great deal, but it will matter come 2019. As of the time of this writing, the EIA anticipates that US output for next year will average 12.06 million barrels per day. In the fourth quarter of the year, this figure should be 12.31 million barrels per day. It’s difficult to anticipate such timid growth next year if recent additions are accurate.
To be fair, one positive for oil bulls appears to be the fact that a chunk of this recent increase can be tied to offshore projects coming online. In August, for instance, offshore production in the Gulf of Mexico totaled 1.932 million barrels per day. This was up 68,000 barrels per day compared to a month earlier and was 0.410 million barrels per day higher than the 1.522 million barrels per day seen in May. Over time, offshore output likely will increase, but due to their long-term development cycles, high costs, and the fact that the offshore space is still struggling to recover from the last downturn in prices, it’s probable that we won’t see the same kind of soaring output next year from the space that we did in recent months. That said, production increases can still be big.