The rise of US oil production is one of the most significant changes to
the global political economy. It also has staying power. The
International Energy Agency forecasts that US output over the next five years
is likely to rise to 12.1 mln barrels a day from 10.6 mln a day projected for
this year, though the US Energy Information Administration projects it is
reaching 11 mln barrels a day. The IEA cautions that if oil is $60 a
barrel, US output may rise by only 1.4 mln barrels, but at $80 a barrel
is may rise by 3 mln barrels a day.
The IEA estimates that the US output increase will be sufficient to cover
60% of the projected increase in demand, while the rest can be met by three
other non-OPEC producers, Brazil, Canada and Norway. It estimates that
non-OPEC output can rise by 5.2 mln barrels a day over the next five
years. US oil output rose by 670k barrels a day last year, helped by an
increase of 200 drilling rigs. OPEC capacity is projected to rise by
about 750k barrels by 2023.
Demand is projected to grow by about 1.1% a year through 2023, with a bit
more than half accounted for by China and India. In addition, IEA
estimates that the natural depletion that needs to be replaced is about 3 mln
barrels a year.
Over the longer-term IEA is concerned that since the drop-in prices in
2014, there has not been sufficient investment and this could create
bottlenecks unless the deficiency in upstream investment addressed. It
estimates that new investment fell 25% in both 2015 and 2016 and was flat in
2017.
Light sweet crude for April delivery jumped nearly 2.2% yesterday, the
biggest rise in three weeks. The gains are being extended
today. A key consideration was a private sector estimate that the storage
at Cushing, a key oil hub, has continued to decline and is at the lowest since
2014. Cushing inventories have not risen since mid-December. Output
at Libya’s biggest field was interrupted (already coming back), and UAE output
has slacked due to seasonal maintenance. API estimate is due later today,
ahead of tomorrow EIA projections. The EIA is expected to report that US
oil stocks increased for the second consecutive week. It would be the
fifth of the past six weeks that US oil inventories rose.
Last week, the April contract reached a high of a little above $64 a
barrel before falling to nearly $60 before the weekend. It closed
above $62 yesterday and has moved above $63 today. A return to last
week’s high may wait for the inventory data and developments in other markets.
We note the correlation between the price of oil and the S&P 500 has risen
markedly. On a rolling 60-day basis, and conducting the analysis on the
percentage change in the S&P 500 and oil, generated a correlation of 0.38,
which is the highest since late 2016. On a purely directional basis,
where the correlation is conducted on the level of the S&P 500 and the
level of oil is near 0.81, the upper end of the correlation range for the past
five years. It may be that both oil and the S&P 500 currently are
correlated to a third factor, optimism on US growth.