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Why oil prices will remain weak

LiveMint logoLiveMint 14-06-2017 Livemint

WTI (West Texas Intermediate) crude prices averaged $48.63 a barrel in 2016. Prices have averaged higher so far this year, at around $51.8 a barrel. That suggests that the global crude oil market has got some support from the efforts of the Organization of the Petroleum Exporting Countries (Opec) and non-Opec oil producers to cut production.

Graphic: Vipul Sharma

The production cuts have been extended for another nine months. But there is good reason to believe that oil prices will be capped. For one, higher-than-expected shale oil production in the US partly offset Opec and non-Opec production cuts at the beginning of this year. As chart 1 alongside shows, break-even prices for US shale oil regions have dropped substantially over 2013-2016. Over the past few years, technological advances have made US shale oil profitable at much lower prices. Accordingly, higher shale oil supplies will weigh on prices.

Chart 2 shows that a rebound in drilling activity doubled the US oil rig count from its 2016 low. “As a result, oil inventories remain high, particularly in the US—a key factor behind persistent weakness in oil prices,” pointed out a World Bank report on Global Economic Prospects. In short, whenever oil demand rises and prices go up, it will be met by increased supply from the US.

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