The Slippery

Task of Balancing
Supply and
Demand in the
Oil Market

(ANDREW COWIE/AFP/GettyImages)
 This report cannot be shared or copied without express permission from Stratfor. Copyright Stratfor 2018.
The Slippery Task of Balancing Supply and Demand in the Oil Market
• A number of factors including increased de-
mand and continued production cuts are contrib-
uting to the rise in Brent crude oil prices.
• Russia and many OPEC members view higher
prices with cautious optimism. They’ve tried to
curb production enough to keep oil prices stable
without curbing it so much so as to direct invest-
ment to North American shale oil production or
alternative energies.
• There are conflicting views about how much
U.S. production has actually increased and how
sustainable the increase is, but many producer
countries remain concerned.
The price of Brent crude oil topped $70 per barrel
briefly Jan. 11 for the first time in more than three
years. The rally in oil prices, which are up 59 percent
since 2017 lows reached in June, has been driven
by a number of forces, including increased demand
and continued production cuts. Though breaking
through the symbolic $70 price level for the inter-
national benchmark is music to the ears of some
producers who have cut output, higher oil prices
are both a blessing and a curse for Russia and many
OPEC members that have sought to curb production
to keep oil prices relatively stable without causing
them to increase so much that they boost invest-
ment in North American shale oil production and
alternative energies.
The Rationale for Production Cuts
When Russia and Saudi Arabia and its OPEC allies
began limiting output in January 2017, their main
January 2018
goal was not necessarily to increase oil prices
above $70 or even $60 per barrel, but to reduce
global oil inventories. Between late 2014 and early
2017, Saudi Arabia, Russia and others boosted
production to reduce the price of oil and thus
undercut shale oil production in North America
by making it unprofitable. The global supply of oil
exceeded demand by as many as 2 million barrels
per day and inventories swelled. Commercial crude
oil inventories in the United States at the start of
January 2017, for example, were 48 percent higher
than they were at the start of January 2014. To
stabilize the oil market and stop prices from con-
tinuing to fall, a change in strategy was needed and
many producers cut their production.
The new strategy has worked, to a certain extent.
But it remains a work in progress. As 2018 gets
underway, commercial crude oil inventories in the
United States remain 28 percent higher than they
were four years ago. This week, Suhail al-Mazroui,
energy minister to the United Arab Emirates, noted
that global stockpiles are more than 100 million
barrels above their five-year average. Therein lies
part of the challenge: Producers want to shrink
oil inventories, but the market’s price may have
increased too quickly in response. When Brent oil
prices broke even $60 a barrel ahead of a meeting
in November during which producers agreed to
extend production cuts to increase prices, several
OPEC delegates, such as Iranian Oil Minister Bijan
Zanganeh, expressed concern that higher prices
might be counterproductive, a sentiment shared by
Saudi Energy Minister Khalid al-Falih.
STRATFOR • 2
Why Prices Have Increased
There are several reasons why oil markets have
tightened. During the first half of 2017, the cuts
made by Saudi Arabia, the United Arab Emirates,
Russia and others were significantly offset by rising
production in Libya and Nigeria. By the end of the
year, however, structural limitations caused Libya’s
and Nigeria’s production to peak. At the same time,
Venezuela’s economic and political crisis continued
to wreak havoc on its production capacity, with
production falling to levels not seen since 2002. In
December alone, production fell by an estimated
100,000 barrels per day to around 1.7 million.
Moreover, the United States has increased pres-
sure against Iran, a major oil producer, and there
remain concerns that the United States may not
extend sanction waivers.
On the opposite side of the market, demand con-
tinues to be robust, driven by worldwide economic
growth. On Jan. 9, the World Bank increased its
global economic growth estimates for 2018 to 3.1
percent after growth in 2017 was stronger than
expected. However, this expected economic growth
could be curtailed by any number of events. Two
points of particular uncertainty are the U.S. trade
enforcement plans against China that Washington is
expected to unveil later this month and the direction
NAFTA negotiations will take.
The U.S. Role
Nevertheless, higher oil prices will make investment
into U.S. shale oil more attractive. West Texas
Intermediate, the U.S. benchmark, has been trading
over $60 per barrel for several weeks now. At these
prices, shale oil production becomes more econom-
ical in more areas. By many estimates U.S. produc-
tion is set to take off this year — which is concerning
for many other producer nations. Between January
and October 2017, U.S. production rose by 812,000
barrels per day, according to the U.S. Energy
Information Administration (EIA). On Dec. 9, the EIA
estimated that U.S. crude oil production could av-
erage 10.3 million barrels per day in 2018 — record
levels for the United States and roughly 1 million
barrels per day higher than estimated 2017 figures.
There are conflicting views about how sustainable
the increase in U.S. production is, and to what ex-
tent it actually exists. Some observers have argued
that the vast majority of the production increase has
been in the form of natural gas liquids or conden-
sates — lighter hydrocarbons that include propane
and butane when refined. These liquids are less
valuable than gasoline and diesel to refiners and
largely are destined to the export market, where
they are sold relatively cheaply. Natural gas liquids
and condensates could be one reason why, despite
the recent rally in oil prices, the number of active
rigs drilling in North America actually has declined
over the past six months. □
STRATFOR • 3
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