OPEC has unwittingly initiated a “vicious cycle” with US shale producers “whereby supply remains bloated and oil prices stay depressed,” said Leung.
Although cartel members’ agreement to drastically cut production helped drag oil prices above the $50 per barrel mark initially, it simultaneously opened up a gap in the market for US shale producers to begin ramping up production, he said.
Since the deal was struck last November, US shale production has expanded rapidly, adding over 250,000 barrels per day to America’s total output.
US rig counts have also increased by 30% and improvements to horizontal drilling methods and ongoing industry consolidation mean that number could grow higher.
It’s for this reason that “any catalyst for higher oil prices is likely to be short-term in nature only,” Leung argued.
Judging from the oil futures market, Leung anticipates oil prices will hover in the low $50s from now until 2022.
“Though not an accurate prediction of future prices by any means, the oil futures market offers investors an indication of where prices are heading,” he stated.
“Currently, the term structure of WTI oil futures implies limited upside with futures prices anchored in the low US$50s all the way through to 2022—a 5-10% increase against current spot prices.”
But Leung thinks this reality of depressed oil prices is not necessarily bad news for short-term and long-term investors.
