Going Down?

Oil prices fell more than 1% yesterday hitting 14 month lows after reports of an increase in U.S. inventories along with surging shale output.

The American Petroleum Institute reported yesterday that U.S. crude supplies rose by 3.5 million barrels last week.   In addition, stats show an increase in gasoline stockpiles by 1.8 million barrels and a decline in distillate inventories by 3.4 million barrels.   Inventory statistics from the Energy Information Administration (EIA) are set to be released later today.   

According to the US Energy information administration, production from the largest shale areas, including the Permian Basin will surpass the previous record of 8 million barrels per day in early 2019.  Current U.S. production is running at 11.7 million barrels per day which is already at record levels and there are expectations that the growth will continue by 1.3 million barrels per day in 2019.   

With such a robust picture on the supply side along with doubt around weakening global economic growth the oil complex elevator continues to point down.

“As usual oil markets are all about the basics of supply and demand, so when excess amounts cross paths with a bearish global growth outlook, it provides an exceedingly bearish signal for oil prices which have only one place to go, and that’s down,” said Stephen Innes, head of Asia Pacific trading at Oanda. “With market struggling for direction oil prices were very prone to shift in risk aversion, but when global growth concerns trigger risk off it’s hugely negatively impactful for oil prices.”

So, when will lower oil prices impact U.S. shale production?   

 “Total U.S. shale oil growth is highly sensitive to WTI prices in the $40-60 range,” Morgan Stanley wrote in a December 13 note. The investment bank said that shale producers are growing more sensitive to prices below $60 but less sensitive to price spikes above $60. “If WTI remains around current levels (~$50/bbl), US growth should start to slow.”




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