What's going on?
A report on Wednesday from the International Energy Agency (IEA), the major intergovernmental energy organization, confirmed that last month oil production in the Middle East increased while production in the US declined. This is indicative of a larger trend that’s taken place in oil markets in recent years.
What does this mean?
It is much cheaper to drill for oil in the Middle East than it is in America. So when the oil price drops precipitously (as it has in recent years), it becomes unprofitable for many American companies to keep drilling – and, therefore, many stop producing oil. This year has seen US oil production decline to its lowest level in more than two years. But, at the same time, Middle Eastern producers are increasing their production – thereby grabbing a bigger part of the oil-production pie.
Why should I care?
The bigger picture: Declining oil production has left a hole in the US economy.
The booming oil and gas industry was a big part of the economic recovery that took place after the Great Recession (2008/09) – but since 2014, the oil and gas industry has slowed significantly. The good news (for the economy at least) is that US production is expected to decline less next year than it has this year – and so America might have already experienced the worst of the economic pain associated with the low oil price.
For markets: The oil price seems to have hit a ceiling in recent months.
It’s rebounded about 75% since its low of $27/barrel in February, but it’s struggled to sustainably break above $50. Part of the reason is that if the price were to go much higher, many US companies would probably start increasing their production (as it would become profitable for them, once again). In order for new supply like that to be absorbed by the market, demand for oil would have to increase – and, while demand is growing, it’s probably not growing quickly enough to counter the supply that would come from significantly more US production.