‘Wall of supply’ to halt oil price rally

Oil’s rally will stall at $55 a barrel as US shale drillers get back to work and a “wall of supply” from investments made over the past decade hits the market, says Goldman Sachs Group.

Global oil markets are set to remain “very oversupplied” in 2017 amid the return of disrupted output in Nigeria and Libya, resilient US shale production and the start of major projects commissioned over the past 10 years, Goldman’s head of commodities research Jeff Currie said in a Bloomberg television interview.

“We’re still seeing a lot of oil enter this market,” Mr Currie said in an interview with Tom Keene and Francine Lacqua.

“It’s hard for this market to go above $55. The sweet spot is 2017”, for supplies coming from new projects reaching world markets, Mr Currie said.

The outlook for an oversupplied market next year drove Opec’s announcement in Algiers last week that it will cap production at 32.5 million to 33 million barrels a day, he said.

Shale producers are hedging their output as soon as prices climb to a range of $50 to $55 a barrel, allowing them to continue drilling, Mr Currie said.

The number of rigs targeting crude in the US has risen for a fifth week to the highest since February, Baker Hughes said last week.

While investment in new oil supply has been cut, any shortage in the market is years off, Mr Currie said.

A ‘bull state’, where output shortfalls push prices above $100 a barrel, couldn’t happen before 2019 or 2020, he said.

Oil futures haven’t traded above $100 since 2014.

Oil maintained gains yesterday, approaching $50 a barrel in New York, after government data showed that US crude stockpiles dropped last week.

Crude stockpiles slipped 2.98 million barrels last week, according to the Energy Information Administration.

That contrasts with the 1.5 million barrel increase forecast by analysts and a 7.6 million barrel decrease reported earlier this week by the industry-funded American Petroleum Institute.

West Texas Intermediate for November delivery rose $1.10, or 2.3%, to $49.79 a barrel at one stage in New York trade.

Brent for December settlement increased $1.12 to $51.71 a barrel on the London-based ICE Futures Europe exchange.

Meanwhile, the waning effects on the Norwegian economy from the oil price slump will lead to the government rolling back some its massive fiscal stimulus.

There are signs the economy of western Europe’s largest oil producer is on the mend, analysts say.