FxWirePro: Oil likely to correct lower before rising again

Bearish factors are continuing to pile up for the oil price and the biggest of them is shale oil from the United States. Though the broader trend is still bullish, these bearish factors could push down the price of oil before it starts rising again.

As the oil price recovered after bottoming in June, so has the U.S. oil production. After rising by more than a million barrels per day in 2017, the U.S. production has surged by almost 0.6 million barrels per day in less than three months of this year. The production increase continues to beat all estimate. To put it in more relevant context; while the OPEC and participating non-OPEC producers agreed to reduce production by 1.76 million barrels per day compared to the October 2016 output, the U.S. oil production has surged by more than 1.84 million barrels per day since then.

While the surging shale oil production in the United States remains the biggest threat to OPEC agreement and oil price; there are other factors which are exerting pressure on oil price.

• The demand growth forecast for 2018 has been revised lower to 1.4 million barrels per day compared to 1.6 million barrels per day in 2017.
• U.S. commercial inventories, after declining by more than 54 million barrels through the course of 2017, in the first two months of 2018, it has actually risen.
• Russia has expressed its displeasure with the OPEC agreement since it is subsidizing U.S. shale producers and the cost of production in Russia remains low.
• Iran’s oil minister Bijan Zanganeh has suggested that OPEC producers might loosen the production restriction at its June meeting. Iran is looking to increase production its own production quota from 3.8 million barrels per day to 4 million barrels.

It is more likely that oil price would correct lower before rising again. Another 10 percent correction (at least) would be appropriate. Do note, the broader trend is still bullish even if it corrects in the near term. WTI is currently trading at $61.3 per barrel and Brent at $3.6 per barrel premium to WTI.