Finding demand outlets for this new production remains the US energy sector’s biggest challenge. If production continues to grow and US laws don’t change to allow exports, the resultant glut could result in a precipitous decline in the price of WTI and other North American price benchmarks.
Potential release valves for rising domestic oil production include expansions to US refining capacity, relaxing US export restrictions (likely after the next presidential election) and transporting more volumes to California, a state that imports most of its crude oil from the Middle East and South America.
However, investors shouldn’t expect production growth to sync up exactly with the development of these release valves. This scenario heightens the risk that WTI could pull back to less than $70 per barrel, slowing drilling activity and alleviating the glut of crude oil. Such a price accident likely won’t occur until after 2015, assuming that current trends and US export policies persist.
The futures curves support the view that US oil prices are likely to fall in coming months.
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Elliott and Roger on Nov. 26, 2019
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