Oil futures finished at an eight-week high Friday, surging to almost $70 a barrel during the week. The surge was a knee-jerk reaction of the markets to the unexpected drop in the US crude inventory by more than 2.6 million barrels and the Saudi desire to extend the output cut arrangement in 2019 too.

But behind the scene, at least two other developments were impacting both – the energy geopolitics and its overall mathematics.

Pundits are beginning to weigh in the hardening of the US position on Iran and its possible impact on crude markets. There is a growing consensus that on May 12, President Trump will not sign the Tehran sanction waiver.

And in the meantime, with Saudi Crown Prince Mohammad bin Salman underlining that in case Iran goes nuclear, Saudi Arabia too would opt for nuclear capability, political heat in the oil rich region is rising, and beginning to effect energy markets.

For the first time in many months, the fear premium is rising. Markets seemed taking note not only of the emerging geopolitical scenario but also the possibility of further fall in the Venezuelan output.

Yet, the mid-to-long term crude scenario continues to be murky. Pundits are not ready, at least as yet, to ignore the negatives lurking in the background.

Rising US crude output remains a major cause of concern. As per the US Energy Information Agency (EIA) Short-Term Energy Outlook (STEO), released earlier this month, the US crude oil production averaged 10.3m barrels per day (bpd) in February, up 230,000 bpd from the January level. This was exactly 1m bpd higher than the average US output of 9.3m bpd in 2017.

The EIA is now projecting that US crude oil production to average 10.7m bpd in 2018 and 11.3m bpd in 2019.

The growing US crude output is not only negating the efforts made by the Organisation of Petroleum Exporting Countries (Opec) and Russia, it is also taking over the market share that has been ceded by them.

This is going to impact the overall crude mathematics and analysts are taking note. As per a Reuters report, hedge funds have resumed liquidating their bullish long positions in crude oil and refined fuels amid more signs that the price rally may be fizzling out.

The Organisation of the Petroleum Exporting Countries (Opec) too is aware. In its March oil market report, it has increased again its forecast for non-Opec output in 2018, reflecting the surging US output, expecting the non-Opec supply to outweigh the demand growth this year.

Rystad Energy, the Norwegian energy consultant in a recent report, too is underlining that crude oil prices could be in for a fresh collapse in 2019 unless Opec increases and extends its oil production cuts, as production from the increasingly competitive US shale sector grows further.

Rystad has even more bullish forecasts about the US oil output. “Shale is not dead, shale is reborn and has strong growth potential [even] at $40 to $50 oil,” said chief executive Jarand Rystad. “It has the potential to again crush the oil market,” he underlined.

The Rystad report is now predicting that the US output could grow to 11.4m bpd by the end of this year and potentially to 12.7m bpd by the end of 2019 – thanks to lower costs and higher well productivity.

The surge in US shipments to Asia threatens to undermine the deal between Opec and its allies, carrying the risk of oil sliding under $60 a barrel, says the ING Groep NV.

While the producer group complied with the pledge to curb output, US flows that are gaining a bigger slice of the prized Asian market may prompt some nations to boost supplies, said Warren Patterson of the Dutch bank. The resulting fallout could drag down crude prices, he emphasised.

“The longer the deal goes on, it’s going to start falling apart,” Patterson said in a press interview insisting the deal continues to give market share away to the US

Some reports also indicate the Opec is splitting into two distinct camps. On one side is Saudi Arabia, which wants oil prices at $70 a barrel or higher (for the obvious reason of the impending Aramco IPO), and on the other is Iran, which wants the price to be around $60.

“If the price jumps [to] around $70…it will motivate more production in shale oil in the United States,” the Iranian Oil Minister Bijan Zanganeh told The Wall Street Journal in a rare interview.

The Opec’s balancing act seems in for some real challenges. But will Riyadh pay heed to it? This remains a big if.

Published in Dawn, March 25th, 2018