Shale is the name of the game

Momentum remains very negative in the oil market. Investors have lost patience, largely ignoring any positive signals and focusing only on the bad news. The latter being mainly that US shale production continues to increase (albeit at a pace far from sufficient to offset OPEC/Russia production cuts and the natural decline rate of non-OPEC conventional oil production) and that US oil inventories are not declining fast enough (even though they are declining).

OPEC and Russia, also surprised by the negative sentiment and slower-than-expected oil inventory decline, decided in May to extend their 1.2-1.5 million barrels/day production cuts through March 2018. Alongside solid demand growth (estimated at 1.2-1.5 million barrels/day year-to-date), this should be more than sufficient to purge excess inventories.

And after all their efforts to balance the oil supply-demand equation, it is unthinkable that OPEC and Russia would then revert to oversupplying the market again in 2018. Further patience will, however, be needed before the investor mind-set changes and sentiment turns positive on the oil market.

That being said, we have now entered a period (the summer months) in which oil demand tends to peak because of the US driving season and Middle Eastern air-conditioning needs. This should translate into fast inventory drawdowns, assuming OPEC/Russia stand firm on their production cuts.


Meanwhile, fears of rapidly growing US shale production seem unwarranted as the sector faces increasing production bottle-necks due to a lack of fracking material.

All told, we remain confident that the market will move into balance within six to nine months, setting the stage for higher oil prices.

(update : 10.07.2017)