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US oil output growth may flatten after 2018 on rising costs: Vitol

US oil output

The head of oil trader Vitol expects US oil output to continue to grow into 2018, but higher production costs may mean production will plateau.  Patriot Energy photo.

US oil output expected to climb by 0.5-0.6 million b/d in 2018

The head of global oil trader Vitol says US oil output could spike in 2018, but growth will likely flatten for a number of years as rising costs make production uneconomic.

Ian Taylor told Reuters that the US has become a major oil exporter recently thanks to the shale revolution which helped create the worldwide crude glut that sent oil prices tumbling below $30/barrel last year.

“I think the question, a little bit in the longer term is – is this the last big rise in U.S. production?” said Taylor, chief executive at Vitol.  The company trades over 7 per cent of global oil.

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Taylor says he expects US oil output to increase by 0.5-0.6 million barrels per day (b/d) in 2018, but the increase would force costs higher and result in some loss-making production.

“If you look at the economics on most of the big Permian players, not many of them make a lot of money,” Taylor said.

Taylor says the slowdown in US production along with robust global crude demand growth will push prices above current prices.

However, in the short and medium term, Taylor says oil markets will continue to be “boringly rangebound”.  He also expects oil prices to face downward pressure in the first quarter of 2018 when demand historically has weakened.

“The market is tightening up. But it’s very shallow … There will be moments when we must get closer to $60 and moments I‘m sure when we’ll flirt with a number with a 4 in front of it. But it’s a pretty narrow range,” Taylor told Reuters.

One reason for Taylor’s optimism concerning oil prices is Vitol has sold most of its oil storage, signalling a tighter market.  That, combined with a demand growth of between 1.5-1.6 million b/d in 2017 and 2018 along with decreasing investments by oil majors may mean crude prices could rise next year.

2017 has been a challenging year for Vital, says Taylor.  Gross margins for most trading houses dropped under 1 per cent because of market direction and volatility.

“The prices haven’t moved, the disconnects aren’t really there, so it’s a tougher business … We traders don’t like instant volatility. We’re very useless at that. We do like to see a trend for more than a nanosecond.”

“We’re doing a bit more volume for a little less return … It’s not rocket science, but margins are very, very tight. Extremely tight,” he said.

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