After years or relentless selling, crude oil prices rebounded spectacularly earlier this year with Brent and WTI futures near-doubling in the space of just over three months.
The chart below, courtesy of Thomson Reuters, shows the dramatic rebound in both Brent and WTI front-month futures contracts from the depths struck in mid-February.
Quite a recovery, right?
While there were numerous factors that contributed the enormous rebound, one of the chief catalysts was the slowdown, and eventual decline, in US crude production levels.
According to Vivek Dhar, a mining and energy commodities analyst at the Commonwealth Bank, “the 1.1mb/d [million barrels per day] decline in US oil output since June 2015 has been critical in rebalancing global oil markets” helping to “offset surplus concerns from high OECD crude oil inventories and rising output from Iran”.
At 9.5%, the drop in US crude output in the year to June was the largest seen October 2008, helping Brent and WTI top $50 per barrel in early June.
While crude price have since fallen by close to 10% from the recent highs, the decline in US production levels has been a welcome development for an industry that was coming under increased financial pressure due to the dramatic drop in price seen over the past two years.
However, with prices stabilising around $45 per barrel and US shale oil rig productivity continuing to improve, the decline in US production may be about to come to an end, suggests Dhar.
“Over the last month US oil rigs have started to increase, while US oil output has expanded over the last fortnight. These outcomes suggest that US shale oil costs have come down enough to restart production again,” says Dhar, noting that “a good portion of this cost reduction can be attributed to improving US oil rig productivity”.
The excellent chart below, supplied by the Commonwealth Bank, shows the improvement in major US oil and gas basins by output per individual rig. While lower crude prices have seen great swathes of wells cease production, many others have found ways to become more efficient, making them economically viable even at lower price levels.
Should this trend trend, Dhar believes that it may be hard for crude prices to rally beyond the highs seen earlier this year, at least over the short to medium term.
“If US shale oil output is restarting at current prices, crude oil price may be capped at $US50/bbl,” he says.
Certainly not a bearish forecast, but nor an overly bullish one either.
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