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Why this oil price will not last last



After weeks of gloom, the oil market is increasing again. But it is not clear how long the upward cycle lasts. OPEC admitted this week that it may be necessary to keep production cuts in place, perhaps after the latest expansion, due to heavy US shale production.

A combination of geopolitical excitement in Persia, outbreaks in Venezuela and Iran, a pending interest rate cut of the Federal Reserve, and brewing storm in the Gulf of Mexico have led to strong price increases in oil over the past few days.

The rally may have "go on", as Standard Chartered put it in a recent note to clients. "We think the rally is likely to continue, so Brent can move well above $ 70 / bbl and WTI to test over $ 65 / bbl," the investment bank wrote. "The foundation is supportive in the third quarter; we project a global supply deficit of 0.5 million barrels per day (mb / d), while data from the IEA and OPEC suggest an even bigger deficit," Standard Chartered analysts said.

They are "The fourth consecutive weekly decline in US crude stocks shows that the US oil market is now tightening," Commerzbank said. Storm in the Gulf of Mexico and rising tensions in the Middle East "The general situation points to further rising oil prices in the short term," concluded Commerzbank.

However, some of these are temporary factors that can disappear, especially with shale supply growing rapidly. Demand growth can only reach 1

.14 million barrels per day (mb / d) this year, but growth from non-OPE C-countries alone can increase 2.05 mb / d. Next year, non-OPEC supply can jump by an additional 2.4 mb / d, and demand again only grows by 1.14 mb / d. Related: OPEC : This is where the most new oil comes from in 2020

In other words, OPEC + can get stuck with the production pieces, forced to permanently extend them in a Cypriot attempt to keep oil prices from coinciding . The supply constraints actually set a floor below prices, but it only serves to connect even more slate drilling.

"Infrastructure limitations – especially pipeline capacity in Permian, downward trend in rig numbers, lower activity in service companies and less fracking – suggest a slowdown in growth in 2019," OPEC wrote in its report. "But … [w] with 2.5 mb / d of expected new pipeline capacity from Permian to USGC, production from the booming Permian Basin is expected to grow without any limitations. "Multiple pipelines mean more drilling, which ultimately means more supply to the global market.

New export terminals also come into existence. Expansion of the pipeline along with port improvements for more exports – especially in Corpus Christi – is expected to increase from a current level of around 1 mb / d to around 2.9 mb / d by the end of 2020, OPEC says. Related: Oil haze on heavy ripening

OPEC's convex is strong. Although OPEC's July report was written in the splendid language of a typical forecast, it offered a rather unfavorable outlook for the cartel. "Demand for OPEC raw material in 2019 was revised by 0.1 mb / d from the previous report to 30.6 mb / d, 1.0 mb / d lower than the 2018 level," the report says. "Based on the first forecasts for world oil consumption and non-OPEC supply for 2020, the demand for OPEC commodity for 2020 is estimated at 29.3 mb / d, 1.3 mb / d lower than the 2019 level. "

In other words, US slate continues to grow at a high pace, OPEC stands facing the possibility that production cuts are not sufficient to balance the market, OPEC suggests that it does not just need to expand production cuts, but may need to further reduce production by 2020 "Time will tell, but the first look of next year's bid and ask numbers is not encouraging if you are a member of the cartel.

By Nick Cunningham of Oilprice.com

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