What's going on?
According to a widely followed report on the oil industry, US companies are producing a dramatically increasing amount of oil – and that risks another big fall in its price. (tweet this)
What does this mean?
Between 2011-2014, with the cost of oil over $100 per barrel, US oil production was booming. The newfound popularity of “fracking” – a technique used to extract oil from shale formations – opened up wide swathes of America to profitable oil drilling. But as US supply increased, it put pressure on the oil price. In 2014, it began to plummet: by early 2016, oil prices were down over 75% from their peak. US shale drillers cut production massively, and many went bankrupt. But a resurgence in the oil price since then, particularly over the past six months, has encouraged a new US shale boom.
Why should I care?
For markets: Oil’s rise has helped drive inflation higher – threatening stocks and bonds.
Rising inflation, partly underpinned by the rising oil price, has been one factor behind the recent bond selloff (since bonds pay a fixed amount of interest, they are worth less as rising inflation more rapidly degrades the value of those payments). Lower bond prices have in turn put pressure on stock prices. But the oil price has had a rough past few weeks – and Tuesday’s report suggests it may fall further over the coming months. That would put downward pressure on inflation, and perhaps give stock and bond prices a breather.
The bigger picture: America’s rising influence threatens the deal that’s underpinned the oil price’s strength.
The report predicts the US will become the world’s biggest oil producer by 2019. This will diminish the influence of two other major producers, Russia and Saudi Arabia, which spearheaded an agreement 18 months ago to limit oil production (thereby boosting its price). As US production continues to increase, this deal is likely to have less impact – thus removing a key supporting factor for the oil price.