Goldman says oil to surpass Dollars 80 with market likely balanced

Javier Howell
February 5, 2018

But as with so many crude gains and losses, Thursday's performance seems triggered nearly by primal reaction rather than sound reasoning: John Kilduff, founding partner at Again Capital, pointed out that the high compliance is not so much an indication that OPEC members are willingly cutting their output but rather "a reminder of the stark decline in output in Venezuelan oil output".

Goldman says it believes the rebalancing of the oversupplied oil market has actually already occurred, six months earlier than it expected.

Here's the U.S.'s short but epic journey from a grateful importer of OPEC oil to a promising global energy exporter.

It was the first time domestic crude production has surpassed 10 million b/d since 1970, EIA said in its latest Petroleum Supply Monthly report, which was released Thursday. The three-year oil price downturn starting in 2014 was induced by US shale and has already rocked many nations in the Organization of the Petroleum Exporting Countries that have to scramble to find new sources of revenues and appease their citizens. That's the highest figure since November 1970, when the USA produced 10.044 million barrels per day.

But don't just stop here.

Despite the rise of U.S. production, global demand remains strong with analysts expecting a growth in global oil demand to be about 1.7 million barrels a day in 2018.

American production isn't only expanding in onshore shale. Don't blame bubbles or speculators or even oil companies. It's not rocket science.

"The New Oil Order is on hiatus with its next point of reckoning likely a few years away". "They're looking at these values and asking, 'How much more can we get out of the ground?'" From an output perspective, the United States shale sector has fully recovered from the price and output slump that started in 2014 and 2015.

However, not all analysts are convinced that America's oil production spurt will continue.

In January of 2017, when oil prices were trading at around $50.00, the regional production was 621,000 barrels a day. Producers have pulled back from marginal areas to the most productive "core" parts of shale plays such as the Permian in western Texas and eastern New Mexico.

Now, think from a global perspective.

Refineries in the US Gulf Coast, the world's largest refining region, are largely optimized to process heavier crudes, and Saudi Arabia, OPEC's largest producer, has deliberately targeted the US with export cuts to encourage the drawdown of stocks there. For example, there were even concerns if countries like Saudi Arabia will have issues remaining solvent. So again, that's a price level that gives some pause for thought. However, the price differential between WTI and Brent has suddenly narrowed, putting the USA export boom at risk. I suspect that the markets will correct themselves and go higher but small position sizing will probably be necessary.

Stocks for the week to January 26 increased by 6.8 million barrels, or 1.6 percent, to 418.4 million barrels. "Crude oil imports are down 20 percent from 2006 and today we are competing with the Middle East in the export market". And, if you know basic economics, this is a ideal recipe for lower oil prices.

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