Oil headed for its worst week in almost a year as the global risk-asset rout troubled investors already concerned over growing US supply. Futures traded in New York are on track to post a 7.8% slump this week as equities tumbled around the world. Adding to the alarm was data that showed US oil production at a new high, and key technical indicators pointing to a further retreat in prices. WTI earlier slumped close to $60/bbl, all but erasing this year’s gain. Oil’s weakness so far this month follows the best start to the year in over a decade. Yet fears that American shale production will outweigh efforts by OPEC to cut global inventories are back to the fore as data show US output now eclipses Saudi Arabia’s. Another slump in US equity markets on Thrusday highlighted a volatile trading week. U.S. production surged to 10.25 million barrels a day last week, according to government data released Wednesday. With American production set to climb even higher later this year, the Saudi- and Russia-led alliance of other major suppliers will come under renewed pressure to reconsider self-imposed output caps aimed at eroding a glut.
Bit by bit, the US petroleum industry is turning world oil markets inside out. First, sharp drops in U.S. imports of crude oil eroded the biggest market that producers like OPEC had relied on for many years. Now, surging U.S. exports – largely banned by Washington until just two years ago – challenge the last region OPEC dominates: Asia. U.S. oil shipments to China have surged, creating trade between the world’s two biggest powers that until 2016 just did not exist, and helping Washington in its effort to reduce the nation’s huge trade deficit with China. The transformation is reflected in figures released in recent days that shows the U.S. now produces more oil than top exporter Saudi Arabia and means the Americans are likely to take over the No.1 producer spot from Russia by the end of the year. The growth has surprised even the official U.S. Energy Information Administration, which this week raised its 2018 crude output forecast to 10.59 million bpd, up by 300,000 bpd from their last forecast just a week before. When U.S. oil exports appeared in 2016, the first cargoes went to free trade agreement partners South Korea and Japan. Few expected China to become a major buyer. Data in Thomson Reuters Eikon shows U.S. crude shipments to China went from nothing before 2016 to a record 400,000 barrels per day (bpd) in January, worth almost $1 billion. Additionally, half a million tonnes of U.S. liquefied natural gas (LNG) worth almost $300 million, headed to China from the U.S. in January.
In the week that ended on February 9, 2018, U.S. rig count increased by 29 to 975, and Canadian rig count decreased by 17. Compared with the same week last year, rig count increased by 234 in the U.S. and lowered by 27 in Canada. Total rig count in North America increased by 12 from last week.
Investors are increasingly worried by the rising U.S. production and strong growth in rig counts. According to Bloomberg, after a six-month lag, the rig count has finally started to respond to stronger oil prices. Amid broader equity market selloff that saw Dow losing over 10% in a matter of weeks, the oil market is in turmoil. WTI dropped below $60 closing the week at $59, down from the recent high of $65. We think the near-term outlook for oil remains uncertain as stable global demand is met with increasing production in the U.S. OPEC also becomes increasingly important as 2018 progresses and how the organization plans to wind down its production cut.