While the oil industry has been uneasy over the effects of the oil glut of the past couple of years, the year 2018 promises to be different. Global investment banks such as Jeffries have begun to predict that supply restrictions will not only help cut down on excess inventories, demand will rise so quickly as to leave drillers scrambling to catch up.
Since U.S. shale production now lags behind previous estimates, some of the oil price caps in place since the beginning of 2017 may expire. Prices are expected to touch $80 by the end of 2018.
Signs Point in the Right Direction
A number of other pieces of information point to the possibility that production will lag in 2018.
The backwardation seen in the Brent futures now is one important sign to investors everywhere who believe in the possibility of an undersupplied market. Bank of America Merrill Lynch foresees a shortage of a 250,000 bpd in 2017, as well. OPEC nations that planned to lower production levels through to early 2018 have elected to extend these production cuts to the end of the year. Since these countries have begun adhering to levels set out in the deal, world inventories will continue to drop.
The glut, and the price drop of the past two years, have aggressively pushed down exploration and drilling investments in the U.S. and around the world. This is a situation that cannot quickly reverse.
American Production Is Rising
American drillers pumped 9.2 million bpd this year, a number that is expected to marginally rise next year, to 9.9 million bpd. These are the most impressive production numbers in American drilling history. While rising American production levels do place limits on how high prices can go, global shortages still will exist in 2018, and U.S. drillers are well-positioned to take advantage of the situation.
According to Sigma Drilling Technologies, a major provider of dampener solutions for drilling operations, the highly positive outlook for the industry has resulted in greater investment by drilling contractors all around. From purchasing new, high-reliability parts to investing in dampener maintenance to ensure smooth production, investment has been picking up.
All signs say American drilling is on the upswing in the coming year.
