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Widening gap between WTI and Brent increases Shale oil demand

Overall sentiment remains bullish for fossil fuel in near term

Rajesh Bhayani  |  Mumbai 

Oil, WTI, Brent

While prices for both major benchmarks, and WTI, have been rising, analysts say that the price difference in both is also widening, leading to a situation of increased demand for from US. At present, oil is higher by 12 per cent. However, increased production is also likely cap oil prices, according to analysts.

Currently is trading at $56-57 while oil is aroung $63-64 a barrel.

However, the near future trend is looking bullish for both and

T Gnanasekar, Director, CommTrendz Research, a risk advisory firm, says, "So far producers in US were often selling at a loss just to keep business going, but now their shareholders are advising not to sell at a loss. Since prices are rising, contrary to general belief, shale producers may not produce oil in large quantitiers immediately, so that they can fetch higher prices."

The average cost of production for is estimated around $60 plus and the current price is still not there. However, for some producers may be mildly profitable at current prices.

The wide spread between the price for a barrel of Crude and Crude is spurring demand for US In the last week of October, US oil exports reached a new high of 2.13 million barrels a day.

Oil, chart
Gnanasekar says shale producers will also prefer to see prices rising as much as possible and may not flood the market. It is also possible that wil continue with the cut it had implemented a year ago and not go for further cuts. According to report from Focus Economics, an economic advisory firm, "Officials from Russia and Saudi Arabia have been amenable to an extension of the deal well into 2018. US inventories fell 2.4 million barrels in the week ending on 27 October, which was steeper than the 1.75 million barrels decline expected by analysts surveyed by Thomson Reuters, and brought inventories to the lowest level since January 2016."

Overall sentiment as of now for is bullish. Even data from the Joint Ministerial Monitoring Committee of and non-Opev countries shows that the compliance level to last year's production cut in October was 120 per cent, the highest since the start of the agreement. Moreover, Russian and Saudi officials have recently backed the extension of the deal beyond March 2018. On the demand side, healthy macroeconomic figures for both emerging and developed economies are a positive backdrop for oil prices.

Focus Economics report says, "Despite signs that the global oil glut is easing following a three-year downturn, rising output by US producers and concerns about whether participants in the deal will stick to their quotas are still putting a dent in the price trajectory. Geopolitical risks in the Middle East will also play a role, especially mounting political tensions between Iran and the United States, clashes in Iraq between the army and Kurdish forces, and the anti-corruption campaign in Saudi Arabia."

Another reason for the sustained bullish price trend is the emergence of electric vehicles which will hurt fossil fuel demand significantly. And hence oil producing countries may want to take benefit of higher oil prices till the electric vehicals start denting oil demand. "This could also tempt to keep production lower to keep price high," said Gnanasekar.

First Published: Tue, November 14 2017. 01:07 IST