Why oil prices will remain weak
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WTI (West Texas Intermediate) crude prices averaged $48.63 a barrel in 2016. Prices have averaged higher so far this year, at around $51.8 a barrel. That suggests that the global crude oil market has got some support from the efforts of the Organization of the Petroleum Exporting Countries (Opec) and non-Opec oil producers to cut production.
The production cuts have been extended for another nine months. But there is good reason to believe that oil prices will be capped. For one, higher-than-expected shale oil production in the US partly offset Opec and non-Opec production cuts at the beginning of this year. As chart 1 alongside shows, break-even prices for US shale oil regions have dropped substantially over 2013-2016. Over the past few years, technological advances have made US shale oil profitable at much lower prices. Accordingly, higher shale oil supplies will weigh on prices.
Chart 2 shows that a rebound in drilling activity doubled the US oil rig count from its 2016 low. “As a result, oil inventories remain high, particularly in the US—a key factor behind persistent weakness in oil prices,” pointed out a World Bank report on Global Economic Prospects. In short, whenever oil demand rises and prices go up, it will be met by increased supply from the US.