Shale growth, Geopolitical tensions and Re-balancing

It has been a wild ride for oil prices. November 4th, 2017, prime minister of Lebanon Mr. Hariri resigns, at night missiles from rebel occupied Yemen can be seen hurtling across the sky of Kingdom of Saudi Arabia. What begins next has been widely covered by all the major media outlets.

From being termed as a ‘power grab’ to a ‘political purge’ the brusque wave of accountability has scalped all the big guns of the country. Arrests of Prince Alwaleed bin Talal and head of National Guard Miteb bin Abdullah, supposed to be the top contender in the candidature for the Kingship, were quite appalling.

Besides the diplomatic and political comeuppances of these actions, its effect on oil prices was glaring as well. Gaining more than 20 percent in four weeks oil prices crossed $64 a barrel, the highest since 2014 crisis. The gains were further supported by tensions in Iraq and certainty regarding the extension of Vienna accord when the oil producers will meet on 30th November, 2017. Also, in the background was the promising picture of recent inventory withdraws and falling rig count. The oil price rally was the reflection of positive sentiments and high hopes of oil markets and investors as they enjoyed this temporary rally and deemed it as a precursor to the coming stability in the market- a hasty and unfounded conclusion.

That some of the observers were bedazzled by the bright prospective of the oil markets hence ignoring the other side of the equation is completely natural but not logical. I have talked, in my previous article, of the vicious circle (and we all know what that is) which is triggered by an uptick in price translating into a surge in US shale production subsequently hindering an sustainable oil rally which in turn results into a fall in prices. A sort of euthanasia.  It is also important here to slightly touch upon the two factors that can bring in the required ‘sustainability’ factor in these rallies that, now and again, burst forth but fall short of forming any new, higher and permanent floor to prices. One is demand, the second is a reduction in supply by the oil producers (note that production cuts are different from freezing production, which is in place).


This takes us to, what has been termed, a bearish report published by International Energy Agency (IEA) this month. The IEA has lowered its demand forecast by 50,000 bpd and 190,000 bpd for 2017 and 2018 respectively. The report also posited that oil markets might be oversupplied in the fourth quarter of 2017 raising concerns amidst investors. This report is antithetical to what OPEC published last week injecting optimism through mentioning high levels of conformity and touting the total 151,000 bpd reduction in output in the month of October. Other important points include the addition of 1.4 mbpd of oil supply by U.S. shale next year which will easily offset the effects of Vienna accord.

The bearishness doesn’t end here. An article in Bloomberg, torches upon the long-term prospects of U.S. and thereof oil prices. “By 2025, the growth in American oil production will equal that achieved by Saudi Arabia at the height of its expansion, and increases in natural gas will surpass those of the former Soviet Union”, the article said.

The article further goes on to quote Mr. Fatih Birol, IEA Executive Director that “The United States will be the undisputed leader of global oil and gas markets for decades to come”. The price estimate for 2025 in the World Energy Outlook report was changed from $101 previously to $83 and from $125 to $111 for 2040.

In the short-term, however, tensions between Riyadh and Tehran can escalate resulting in a sharp spike in oil prices. But that will be, once again, an ephemeral one. For a substantial rise in oil prices and for markets to re-balance in the true sense, as mentioned earlier, only either by an increase in demand and/or deeper cuts. For the former, even if it happens, we will have to wait and see. The latter might not happen. An extension, yes, but once again—will that be enough?

For now, expect the vicious circle, to play its part every time you see a rally that is not based on a change in fundamentals.

Osama Rizvi
Osama Rizvi
Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.