“For both sides, there has been one twist in the road after another,” said Daniel Yergin, the energy historian and vice chairman of IHS Markit, an energy research consultancy. For prices to rise again, “inventories have to be seen as coming down, and there needs to be a tempering in the growth of U.S. shale production,” he said. “Those are the two things that are defining the market right now.”
But neither is happening.
This week oil traders were shaken by a report by the International Energy Agency that global supplies rose by 585,000 barrels a day in May as both OPEC countries and non-OPEC countries increased production. Oil stocks for the 35 industrialized economies, the agency noted, are not only well above the historical average but higher than when OPEC decided late last year to cut output.
United States oil production, which averaged 8.9 million barrels a day in 2016, will rise to 9.3 million barrels a day this year, according to the Energy Department. The department is projecting production of 10 million barrels a day in 2018, exceeding the record set in 1970. Last week domestic crude inventories eased a bit, but gasoline stockpiles rose by 2.1 million barrels.
OPEC set the latest market cycle in motion in late 2014, when the Saudis and their allies decided to swing cartel policy in an unexpected direction. Instead of cutting production to support prices, as it had done so often in the past, OPEC decided to let market forces loose and then even raised production.
The goal was a sharp but brief price slump that would drive independent American producers out of business to guarantee continued OPEC dominance of international markets.
American drilling did drop precipitously, as companies decommissioned more than half their rigs and neglected to complete wells already drilled through 2015 and part of last year.