The oil market is on a crash course as the OPEC cartel’s efforts to contain global supply pressures have brought down prices to their lowest levels since late 2014.
With the global supply glut easing, OPEC has decided to cut its oil output by 2.7m barrels a day to bring its total production to just under 9.5m barrels.
But that could only be achieved by a combination of lower oil prices, more supply and some major geopolitical shifts in the Middle East.
In the US, oil producers are worried about a possible reversal of supply growth, with US crude stockpiles at a record high.
“We’ve had more production cuts than we’ve seen in recent years, which has led to a lot of production cuts in the US,” said Chris Woodcock, head of energy at IHS Markit.
If supply growth slows, which it’s expected to do, then US oil producers may have to cut production to a third of their normal levels.
OPEC is also set to raise its oil production forecast for the third quarter, due to a potential rebound in world oil demand and geopolitical risks to global supply.
That could mean a cut in output in the first half of next year.
The impact of the OPEC cut is still unknown, as there’s still no evidence of a major geopolitical shift in the region, said Woodcock.
Oil producers are likely to see a slowdown in US shale oil production as well.
While it’s not yet clear what impact the US shale boom will have on oil prices in the long run, analysts expect it to be more significant than the current glut.
US shale oil has been a key contributor to US economic growth since the mid-2000s.
A report by the Energy Information Administration said that US shale growth in the third and fourth quarters was at an all-time high, with the US having the third-highest annual growth rate of any major oil producing country.
Even though the shale boom has been slowed by US shale production being cut, the market is still in a boom-time cycle, Woodcock said.
There is a possibility that OPEC will raise its output target for the fourth quarter, which could cause an acceleration in US oil production growth.
According to the International Energy Agency, oil prices will likely remain at their current levels for the next year, meaning oil producers will continue to cut output to protect themselves from supply disruptions.
Although Brent crude, the benchmark price for US crude, fell more than 3% on Wednesday, its US benchmark price remained stable, meaning it will likely stay above US$50 a barrel for the rest of this year.
Oil markets are not as volatile as they were a few years ago.
Prices are up around 1% a year in the past year.