‘Another Russia’ will keep a lid on the oil price

Oil has rallied by around 40% from January’s six-year low of around $45 a barrel. But in the past few weeks the rally has run out of steam, and it’s hard to see what will sustain the momentum, says Nicole Friedman in Barron’s. The slump in prices caused a plunge in the number of American oil rigs. Last week there were 646 in operation, which is down from 1,482 at the start of the year.

As a result of this drop, you would expect production to fall, but in fact it has edged up as producers have become more efficient. It reached 9.6 million barrels per day (mbpd) last week, a record for weekly data going back to 1983.

Opec, the producers’ cartel, has been trying to squeeze America’s shale producers out of the market by pumping more oil. In April, output from Saudi Arabia, the key producer, reached a record 10.3mbpd. Opec as a whole is producing more than its target of 30mbpd.

As far as Saudi Arabia goes, signs of resilience in US production will just “redouble its determination to maintain market share’” against shale producers, says Fiona Maharg-Bravo on breakingviews.com, as higher prices will just trigger more shale investment. Shale costs, moreover, could well keep falling as drillers gain experience: retrieving oil from shale “is more akin to a manufacturing process than traditional oil drilling”.

According to Goldman Sachs, Opec and US shale output combined could cover the expected growth in global demand all the way through to 2025. Longer term, IHS, a consultancy, estimates that applying shale techniques to mature conventional oil fields could tap another 140 billion barrels worldwide, says Maharg-Bravo. That’s the equivalent of another Russia. Low prices will prompt a rise in demand, but it seems there is more than enough supply around to keep a lid on prices for now.