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Oil Outlook Strong But Massive US Production to Keep a Lid on Prices, Says Energy Analyst

Tue, Jan 23, 2018 - 2:59pm

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With WTI crude oil now trading above $60 a barrel, some are predicting we’ll hit as high as $80 in 2018. Financial Sense Newshour recently spoke with Robert Rapier at R-Squared Energy to discuss his outlook for oil this year, why he thinks the current rally will continue but have a hard time going much higher than $80 with massive production out of the US, most notably from the Permian Basin.

Sustainable Rally to Continue

The rally was long overdue, Rapier noted, as global inventories, which were at record highs and were mostly responsible for the price plunge in 2014 have been coming down rapidly.

Despite hype about electrical vehicles and increases in fuel economy impacting demand, oil production hasn’t been keeping up, especially with OPEC’s production cuts, Rapier stated.

With OPEC set to reduce production, that impact may be a big story. Demand is also a consideration, however, and Rapier expects global demand growth to continue.

US Shale Production 

At the present trajectory, US oil production will exceed 10 million barrels this year, which is a rate we haven’t seen since the early 1970s, Rapier noted. In fact, US production may actually exceed Saudi Arabia’s output.

Without growing global demand, oil prices wouldn’t have climbed out of the $40s, Rapier stated. Global production has increased for the last three years, in line with the increase in demand. If that hadn’t happened, inventories would still be very high, and we wouldn’t see current prices.

us saudi arabia oil production

“A lot of people think prices will come down because of US shale production,” he said. “I was out in the Permian basin last week. They are very, very busy. … Nevertheless, I’m certain that if demand increases by the amount that the IEA is projecting, the US alone certainly will not be able to meet that increased demand.”

Venezuelan Oil Industry in Shambles

On paper, Venezuela has the largest oil reserves in the world. It has far more reserves than the US, and yet we produce more than 6 times the amount.

What happened was, Hugo Chavez began siphoning capital out of the industry, starving it of the capital needed to maintain and increase production. This forced a lot of Western companies, such as Conoco-Philips and Exxon Mobil, to leave, and Venezuela expropriated their assets in the process.

When Chavez went down this path, collapse was inevitable, Rapier stated. At this point, there really isn’t anything that can save Venezuela’s oil production, barring major reforms that encourage investment to come back into the country.

That’s a long shot, because given the current regime in power, it will be difficult especially for Western companies to want to invest any money in Venezuela.

“Venezuela’s days as a major oil producer are finished,” Rapier said. “Had they managed it differently and not killed the goose that was laying the golden eggs, they would still be a major oil producer today, and they would still have some money to fund social programs and the country would be in much better shape.”

Hedging Will Cap Prices

Many producers are anticipating that increased production will cap oil price increases and are hedging as a result. This is why Rapier isn’t predicting $80 a barrel by the end of the year. There are many headwinds for oil prices now, he noted.

The Permian Basin alone is producing 2.8 million barrels a day, which is 1.2 million barrels a day more than the entire country of Venezuela produces, Rapier noted.

“That is the hottest oil field in the world right now,” he said. “But there are a lot of people rushing into the market. We see rig counts starting to go back up. We see people hedging. … I think it’s going to be difficult to get to $80. Having said that, we often overshoot.”

Oil companies are making money at the current oil price, Rapier stated. Despite a potential overshoot to the upside, he doesn’t see a sustainable price over $80 a barrel in 2018, barring some unforeseen geopolitical event that curtails production somewhere.

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