US has emerged as one of the leading oil producers in recent years. It is expected to be the largest in the coming years. Near-term oil prices have firmed on supply disruptions and falling US inventories, especially in Cushing. Meanwhile, the correlation between oil and equities has increased.
The rise of US oil production is one of the most significant changes to the global political economy. It also has staying power. The International Energy Agency forecasts that US output over the next five years is likely to rise to 12.1 mln barrels a day from 10.6 mln a day projected for this year, though the US Energy Information Administration projects it is reaching 11 mln barrels a day. The IEA cautions that if oil is $60 a barrel, US output may rise by only 1.4 mln barrels, but at $80 a barrel is may rise by 3 mln barrels a day.
The IEA estimates that the US output increase will be sufficient to cover 60% of the projected increase in demand, while the rest can be met by three other non-OPEC producers, Brazil, Canada and Norway. It estimates that non-OPEC output can rise by 5.2 mln barrels a day over the next five years. US oil output rose by 670k barrels a day last year, helped by an increase of 200 drilling rigs. OPEC capacity is projected to rise by about 750k barrels by 2023.
Demand is projected to grow by about 1.1% a year through 2023, with a bit more than half accounted for by China and India. In addition, IEA estimates that the natural depletion that needs to be replaced is about 3 mln barrels a year.
Over the longer-term IEA is concerned that since the drop-in prices in 2014, there has not been sufficient investment and this could create bottlenecks unless the deficiency in upstream investment addressed. It estimates that new investment fell 25% in both 2015 and 2016 and was flat in 2017.
Light sweet crude for April delivery jumped nearly 2.2% yesterday, the biggest rise in three weeks. The gains are being extended today. A key consideration was a private sector estimate that the storage at Cushing, a key oil hub, has continued to decline and is at the lowest since 2014. Cushing inventories have not risen since mid-December. Output at Libya’s biggest field was interrupted (already coming back), and UAE output has slacked due to seasonal maintenance. API estimate is due later today, ahead of tomorrow EIA projections. The EIA is expected to report that US oil stocks increased for the second consecutive week. It would be the fifth of the past six weeks that US oil inventories rose.
Last week, the April contract reached a high of a little above $64 a barrel before falling to nearly $60 before the weekend. It closed above $62 yesterday and has moved above $63 today. A return to last week’s high may wait for the inventory data and developments in other markets. We note the correlation between the price of oil and the S&P 500 has risen markedly. On a rolling 60-day basis, and conducting the analysis on the percentage change in the S&P 500 and oil, generated a correlation of 0.38, which is the highest since late 2016. On a purely directional basis, where the correlation is conducted on the level of the S&P 500 and the level of oil is near 0.81, the upper end of the correlation range for the past five years. It may be that both oil and the S&P 500 currently are correlated to a third factor, optimism on US growth.