Brent crude futures closed at $67.25 on Friday, a price not seen since mid-November.
Since it bottomed out at $50.47 on 26 December 2018, the recovery in the oil price has been pretty steady.
Is that it?
The outlook for demand, and limitations on supply, have justified the gains seen so far this year. But there’s good reason to believe that much of the upside is now priced in.
Like the stock market, oil has benefited from increasing hopes that the US and China can come to an agreement on trade. After markets closed, it became clear that the 1 March deadline for an agreement would be extended. This is likely to be good news as it suggests that a deal is within reach. That in turn will support oil demand in the short term.
Look closer at the supply outlook
On the supply side, the trends are more mixed.
On the surface, it looks like OPEC and Russia’s cuts to output will continue to support the barrel price. Saudi Arabia has stated that it is ahead of schedule in implementing its planned cuts. In addition, uncertainty in Venezuela has potential to reduce global supply.
But we’ve known that for weeks: it’s already priced in.
The US just keeps going
Meanwhile, the free-wheeling US industry is climbing to its highest ever levels of production. The US was the world’s largest oil producer in 2018. Last week it hit a record production high of 12 million barrels of oil per day.
One of the unexpected results of OPEC’s attempts to increase their control over global oil production from 2014 onwards was the reaction of the (mainly US-based) shale industry.
OPEC hoped that driving down the barrel cost would put shale producers out of business. Instead, shale providers have re-engineered their cost structure. They are now back, and are much stronger than before.
Once seen as high-price players that couldn’t survive in a depressed oil environment, US shale producers now have the potential to keep producing profitably at lower price points.
Big oil has rethought its cost structure
What’s more, the West’s big oil players took the opportunity to drive permanent cost savings into their supply chain. Like the shale producers, they embraced new technologies with the potential to driver down production costs.
Forced mega-mergers in the supply chain such as TechnipFMC (NYSE:FTI) and Wood Group-Amec Foster Wheeler also resulted in technologies and supply-chain savings, bringing permanent benefits to western producers.
Like being required to go on a diet, western oil producers have emerged fitter and better able to adapt to what the world throws at them. That permanently weakens OPEC’s ability to prop up prices through supply cuts.