Growth in U.S. oil production is slowing, yet it will continue to blunt OPEC's efforts to cut supply and normalize global inventories, keeping benchmark prices capped at around $50 a barrel this quarter, according to a CNBC poll of energy strategists, traders, and economists. De facto OPEC leader Saudi Arabia is leading calls to deepen production cuts as it battles perceptions of falling compliance. Doubts over OPEC's commitment to supply curbs tipped benchmark oil futures into a bear market in June. Elsewhere, OPEC is also squaring off against familiar rivals. Attempts to prop up the price of oil by the producer group have encouraged U.S. suppliers to put more oil onto an already over-supplied market. But bulls say that's changing as American production shows signs of leveling out and recent declines in U.S. inventories point to market re-balancing. "It's still sheikhs versus shale," said John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years. "I would put an average price for [the third quarter] at just under $50. In the past year it's like Brent was following the U.S. speed limit: 55 max." The "wild card" for oil markets, Driscoll said, remains output from tight oil formations such as the Permian Basin in the U.S. southwest. Brent crude will average $50 a barrel in the July to September period, according to the median response in CNBC's survey of 21 strategists, traders and economists. The lowest call was for $40 oil, while the highest was $56. Brent — the benchmark for two-thirds of the world's oil — averaged $50.79 in the second quarter. UBS bullish oil Warren Gilman, CEO of CEF Holdings offered the lowest forecast at $40 a barrel for the third quarter. "Growing supply will require further cuts from OPEC if they want a higher price," Gilman said. Oil bulls UBS expected prices to hit $60 a barrel in the second-half while BMI Research said prices will likely average $55.20 from the July to December period. Seasonal factors may prove supportive in the current quarter: Gulf producers could hold back oil from the export market to feed higher demand from domestic power generators during the summer, coinciding with strong U.S. gasoline demand. "U.S. demand seems pretty steady despite low oil prices and the lowest summer gas prices in years," said Rachel Ziemba, managing director of emerging markets research at 4CAST-RGE. "I'm a tad more constructive on India and China." OPEC is not ruling out extending supply cuts. Together with stabilizing U.S. inventories, Brent crude futures rose to a two-month high of $52.68 on July 28, rounding off its strongest week so far this year. Crude inventories chalked up their fourth weekly decline, falling 7.2 million barrels in the week ending July 21, as improved product margins encouraged U.S. refiners to process more crude. That put total crude stockpiles below 2016's level for the first time this year. Still, U.S. crude inventories remain stubbornly above the five-year average. "Since oil inventories are the barometer by which the oil market judges OPEC's success in rebalancing the market, a decline in stocks will be positive for market sentiment and the oil price, which on a WTI basis, stands a good chance to once again trade above $50," said BNP Paribas head of commodity strategy Harry Tchilinguirian. ‘Leakage' Saudi and Russian energy ministers in St. Petersburg in July discussed extending their deal to cut output by 1.8 million barrels a day beyond March 2018 if necessary. The level of actual OPEC compliance rates divided survey respondents. "We see Brent prices sustained at or slightly above $50 per barrel over the next few months," said Johannes Benigni, chairman and founder of JBC Energy. "However, this hinges on compliance not only in terms of reported production figures but also in terms of actual arrivals at consumer hubs … otherwise the credibility of the deal and outright oil prices will suffer." JTD Energy's Driscoll said he expected "greater threats" to OPEC and non-OPEC supply cuts. "Any perception that there will be ‘leakage' will take air out of the balloon." UBS, meanwhile, projected that OPEC will remain "steadfast" in its commitment to restrain oil output, but assigned a 20 to 30 percent probability of a breakdown in the OPEC deal, which could translate to a short-term price drop to between $30 and $35. Notably, few survey respondents were willing to venture levels over $50 in the current quarter. "The price range seems to be shifted downwards because of greater efficiencies, new supply and demand not being strong enough to pick up all that extra supply," said Daniel Yergin, a Pulitzer Prize-winning energy historian and vice chairman of IHS Markit. Shale slows Although productivity and efficiency gains driven by innovation helped U.S. producers ride out the oil price collapse, evidence is emerging of renewed financial stress. Depressed prices are forcing some operators to cut capital spending. That's slowing U.S. production growth, offering some support to the oil market. "Oilfield services bottlenecks and low prices over [the second quarter of the year] will constrain drilling and completion activity in U.S. shale plays over [the second half of 2017], paring back on growth," said Peter Lee, oil and gas analyst at BMI Research in Singapore. Baker Hughes' closely watched weekly U.S. rig count numbers in late June declined for the first time since January, while more recent numbers showed only modest increases. "While a single data point is not a trend, it may confirm that the low prices seen in recent weeks are not sustainable for U.S. shale producers," said UBS commodity analyst Giovanni Staunovo. Anadarko Petroleum reported a larger-than-expected quarterly loss last month and said it would cut its 2017 capital budget by $300 million because of depressed oil prices, according to Reuters. The Texas-based firm was reportedly the first major U.S. oil producer to do so. Meanwhile, Halliburton's executive chairman said growth in North America's rig count was "showing signs of plateauing." "U.S. producers are not prepared or able to keep up production at any price," said Ole Hansen, head of commodity strategy with Saxo Bank in Copenhagen. The slowdown in U.S. production, reduced capital spending and declining U.S. stockpiles could give OPEC the cover it needs to justify deeper production cuts to its membership, accelerating the re-balancing process. "These developments have left OPEC with a window of opportunity," Hansen said. "If successful, the price of Brent crude oil is likely to rally back towards $55 during the coming months before renewed weakness sets in as the focus turns to 2018 and the potential risk of additional barrels hitting the market if OPEC and Russia fail to extend the production cut deal beyond Q1 2018." Saudi Energy Minister Khalid al-Falih has said the Kingdom would limit crude exports to 6.6 million barrels per day in August. That's almost 1 million barrels below year-ago levels. Source: Reuters & CNBC
