Shale oil surprises markets again

A sharp fall in the oil price suggests markets have underestimated shale producers’ power to moderate supply.

A sustained low price of Brent crude, which fell below $48 a barrel last week, would hurt oil companies’ profits, said Michael Baxter, economics commentator for The Share Centre, a UK-based stockbroker.

“It seems that markets may have underestimated the extent and speed with which shale gas production can be turned up and down,” he said. “When the oil price was less than $40, as it was 15 months or so ago, shale gas producers eased back, cutting production, leading to rising oil prices. However, it is beginning to look as if the ceiling to the oil price in the current environment is around $50, at which point shale gas producers start to rump up production.”

The low oil price is a challenge for the oil-exporting Gulf countries, which rely on petroleum products for much of their governments’ revenues.

Saudi Arabia, the largest economy in the Gulf, is undergoing a reform drive that is at least partly motivated by its dramatically reduced oil revenues.

However Baxter believes the oil price could return to its pre-2014 levels.

“Don’t fall into the trap of concluding that the oil cycle is dead, or that thanks to shale gas it will never rise above $100 again. This time it is not different and unless the cost of renewables and energy storage falls rapidly in the next few years, the oil cycle will turn again. The cycle is not dead, rather it is sleeping.”

©2017 funds global mena

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