Widening gap between WTI and Brent increases Shale oil demand

Overall sentiment remains bullish for fossil fuel in near term

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

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

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

T Gnanasekar, Director, CommTrendz Research, a risk advisory firm, says, "So far shale oil 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 shale oil is estimated around $60 plus and the current price is still not there. However, for some producers shale oil may be mildly profitable at current prices.

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

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 Opec 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 crude oil 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 crude oil is bullish. Even data from the Joint Ministerial Monitoring Committee of Opec 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 shale oil producers and concerns about whether participants in the Opec deal will stick to their quotas are still putting a dent in the Brent 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 Opec to keep production lower to keep price high," said Gnanasekar.