Improving fundamentals drive higher oil prices. The trajectory of oil prices has defied initial expectations this year, surging despite softening economic conditions and restrictive monetary policy in the West. Year-to-date, WTI and Brent crude oil prices rose 13.7% and 11.3% respectively, and currently stand by at USD81.48/bbl and USD85.73/bbl (as of March 18). The surge in oil prices can be attributed to: (i) disruptions in the global supply chain driven by geopolitical conflicts (e.g. Houthi attacks in the Red Sea, Ukraine's assault on Russian refineries etc.), (ii) ongoing production cuts by OPEC+, and (iii) a surge in global demand exceeding earlier projections for 2024. In Feb 2024, the International Energy Agency (IEA) revised its oil demand growth forecast upwards from 860,000 barrels per day to 1.2 million barrels per day (mmbpd). The US Energy Information Administration (EIA) and OPEC+ have similarly upgraded their forecasts for oil demand growth in 2024; EIA predicts a 1.4 mmbpd increase while OPEC+ projected a robust oil demand growth of 2.25 mmbpd. Moreover, US crude reserves are below historical trend due to a sustained drawdown on the strategic petroleum reserves (SPR) since Aug 2020, and any efforts to replenish the SPR will see a further increase in oil demand.
Figure 1: Oil demand on the rise; surpassed pre-Covid highs
Source: IEA
US shale oil makes a strong comeback. Amid these favourable conditions, US oil production has shown a steady uptrend since 2H23. After averaging around 12.3mmbpd for the first seven months of 2023, similar to the 2022 exit rate of 12.1mmbpd, US oil production jumped since August and exited 2023 at a run rate of 13.2mmbpd, much higher than street estimates earlier in the year, and close to prior record levels last seen in early 2020 pre-Covid. The increase was driven by higher production from the shale patch. Over the last couple of years, we had seen a slowdown in US shale production as the listed US independents focused more on profitability and shareholder returns and less on capex and production volumes, but that story has changed. US shale is firmly back in the reckoning over the last six months or so and gaining market share, as oil prices stay elevated on the back of sustained production cuts by the OPEC+ members. The US is now the world’s largest oil producer by a margin, following production cuts by Saudi Arabia and Russia, and looks set to be a key swing producer with dominant position in the global oil markets. Shale accounts for approximately 76% of total US oil production, making shale an increasingly indispensable component of global supply.
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