The oil market made a modest recovery last year, as production cuts by Opec and its allies helped lift prices. However, the nagging global surplus persisted, due mainly to the relentless rise in US output from producers encouraged by rising prices.
The price of Dubai crude, the benchmark used in Southeast Asia, averaged $53 per barrel in 2017, up from $41.40 the year before. West Texas Intermediate, the US benchmark, pushed close to $60 as 2017 ended and averaged $50.25 for the year, a gain of 16% from $43.15 the year before. Brent crude in Europe averaged $53.33, up from $43.55.
Most of the credit for the improvement goes to the Organization of Petroleum Exporting Countries and 10 allies including Russia. They agreed in September last year to collectively reduce production by 1.8 million barrels per day (bpd) or about 2% of world output. Compliance with the pledged supply curbs has been very firm, reflecting a strong commitment to the deal. Some countries have even cut more than their agreed quotas.
Improving demand also contributed to positive momentum. Global oil demand expanded by around 1.5 million bpd to 97.9 million, the International Energy Agency (IEA) reported in December. The recovering global economy was a major factor, while low retail fuel prices provided an incentive for higher consumption.
Nevertheless, despite the Opec-led output cuts, the goal of rebalancing supply and demand in the oil market remained elusive. This was the challenge Opec faced as recovering prices in turn motivated US oil companies to ramp up drilling and production.
Notably, the number of active oil rigs in the United States rose steadily to 747 at year-end, a dramatic increase from the low of 316 reached in May 2016. That helped lift average US crude production to 9.2 million bpd, up by 400,000 from a year earlier, according to the Energy Information Administration data. By year-end, however, output was close to 9.8 million bpd and is expected to pass 10 million soon.
Another downside risk to the oil price recovery was the increase in production by Nigeria and Libya where domestic unrest began to ease. Nigerian output increased by an average of 400,000 bpd and Libyan production rose by 100,000 bpd. Consequently, the benefits of the Opec-led supply curbs were diluted by the increase in production from the US, Nigeria and Libya.
2018 outlook and forecast: The price of Dubai crude is expected to rise this year and trade in the range of $55-60 per barrel. The market will be driven by a strong demand increase of 1.3 million bpd to 99.1 million, according to IEA forecasts, which take note of the economic upswing in both developed and emerging economies.
In addition, continued cooperation between Opec and non-Opec producers to curb output, led by Saudi Arabia and Russia, should bolster prices. They agreed late last year to extend their cuts to December 2018, with the ultimate goal of reducing crude oil inventories in the OECD countries to the five-year average.
Nigeria and Libya have also agreed to the output cut. They had been exempted earlier because of factional fighting in Libya, which often targeted oilfields, and attacks by militants in Nigeria's oil-producing region. However, cutbacks will not occur until oil production in each country has recovered to an agreed level.
Geopolitical risks in the Middle East will continue to fuel concerns about the stability of oil supplies. Chief among them is the battle for influence between Iran and Saudi Arabia, where Crown Prince Mohammed bin Salman is aggressively consolidating power. Another concern is Venezuela, where dire economic conditions have taken a toll on oil production. As well, conflicts in Libya and Nigeria could flare up again.
Meanwhile, the rebalancing of the oil market remains at risk as it may become oversupplied again in 2018. Output from producers outside Opec will continue to grow by an average of 1.3 million bpd, the IEA forecast in December. The bulk of that production will come from the United States, where the EIA has forecast a rise of 800,000 bpd to a record-high average of 10 million for 2018.
The main concern will be rising shale oil production in the US, now that world prices are above the $50-55 level that shale producers need to break even. Some shale fields enjoy production costs as low as $40 a barrel. As well, new capacity from Brazil and Canada is likely to add another 400,000 bpd to the market.
It is undeniable that the revival of supply from outside Opec, especially from US shale oil, is a chronic factor blocking the recovery of crude oil prices. This demonstrates that Opec no longer has the influence it had two or three decades ago.
Even when prices were weak, most Opec members could still enjoy handsome margins as their production costs -- as low as $10-15 a barrel in Saudi Arabia -- are among the world's lowest. But as prices rise, producers in higher-cost countries are encouraged to get back into the game and take market share from Opec.
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