February was certainly a wild trading month for oil markets, as investors tussled with a selection of fundamental themes impacting the commodity.
We started the year with geopolitical risks, supply disruptions and optimism (albeit cautious) over OPEC’s supply cuts all rallying the bulls. But then oil hit a steep depreciation during the first half of February as relentless growth in U.S shale output weighed heavily on efforts to tackle oversupply woes, inviting bears into the market. I think it’s likely that oil prices may be exposed to further downside losses in the medium to longer term as OPEC scrambles to address the glut.
OPEC and Co. truly deserve to be commended for their ongoing efforts to prop up oil prices, especially given that compliance with crude oil output limits reached a record of 133 percent in January. Recent reports of OPEC and its allies almost achieving their goal to rebalance markets should have offered oil a welcome boost, but bulls were missing in action come early February. The fact that WTI Crude is likely to remain wobbly and unloved, despite OPEC’s valiant efforts, highlights exactly how big a threat shale poses to higher oil prices.
American oil production exceeded 10 million barrels a day in November, the first time it’s topped this figure since 1970. This output eclipses that of leading OPEC producer Saudi Arabia. If U.S. shale output continues to complicate the cartel's efforts to effectively rebalance the markets, OPEC could be forced to implement its previously promised “extraordinary measures” at June’s meeting.
While bulls’ argument for oil to stabilise further is likely based on improved global growth and OPEC’s continued commitment to production cuts, risks associated with the deal falling apart could empower bears further. Questions over the sustainability of oil rallies have been raised repeatedly in the past. The heavily bearish price action seen in early February, coupled with the spectre of growing U.S shale output, could ensure oil weakness remains a recurrent theme.
As OPEC continues to lose market share amid rising U.S. shale production, there is a possibility that the cartel will find itself forced to take action quicker than anticipated. It will be interesting to see what additional steps the cartel may enforce to tackle the oversupply glut without delivering U.S. shale a monopoly on the markets. Ultimately, oil markets still remain a fierce battleground for U.S. shale and OPEC, and this will likely have an impact on upside potential and downside losses.
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