United States oil hits highest since 2014, worries grow of overheated market

The world’s most expensive oil

Oil prices retreated from big gains on Thursday, but still managed to settle at three-year highs after the global Brent benchmark hit $70 a barrel on signs of tightening supply in the United States.

Oil traders have closely watched USA crude production to see whether output gains from US shale formations will surpass the 1.8 million bpd cuts. WTI the day before rose to its strongest since late 2014 at $64.77.

USA production also fell by 290,000 barrels a day to 9.5-million barrels a day, the administration said, despite the expectation of output breaking through 10-million barrels a day.

On Dec. 9, the EIA estimated that US crude oil production could average 10.3 million barrels per day in 2018 - record levels for the United States and roughly 1 million barrels per day higher than estimated 2017 figures. These levels of US crude oil output are expected to continue increasing in 2019 to an average of 10.8 million b/d.

The EIA said USA crude oil production averaged an estimated 9.3 million barrels a day in 2017 and is estimated to have averaged 9.9 million b/d in December.

Adding to bullish sentiment on Thursday, market intelligence firm Genscape estimated a draw of more than 3.5 million barrels at the Cushing, Oklahoma delivery point for USA crude futures for the week ended Tuesday, according to traders who saw the data.

Much of the production growth will be concentrated in the Permian Basin, the largest USA oilfield stretching across Texas and New Mexico, said John Staub, the EIA director of the office of petroleum, natural gas and biofuels analysis.

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A broad, global market rally, including stocks, has also been fuelling investment into crude oil futures.

"This drop in margins could reduce Asian refiners' demand for incremental crude in the near term and weigh on global (crude) prices", said Sukrit Vijayakar, director of energy consultancy Trifecta.

Gulf of Mexico production is expected to average 1.7 million bpd in 2018, relatively unchanged from 2017, and then increase to 1.8 million bpd with the anticipated start of production from the Appomattox project in the Rydberg field and the Mars project in the Kaikias field, along with other projects expected to begin operations this year and next.

Production cuts led by oil cartel Opec and Russian Federation, which started in January a year ago and are set to continue throughout 2018, have underpinned prices.

Fatih Birol, head of the International Energy Agency, said on Friday that oil prices at $65 to $70 a barrel risked encouraging more oversupply from U.S. shale drillers. Oil prices are up around 5% already in 2018.

EIA research shows that us gasoline prices tend to follow the price of the best grades of oil in Europe, more than they follow the price of the best USA crude.

On Tuesday, the EIA boosted output expectations, saying it now sees overall production at record highs, surpassing 11 million barrels per day (bpd) by 2019. "Attention is paid only to news that tallies with the picture of rising prices".

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