There are two big questions hanging over the oil price in 2017. The first is whether the supply truce between Opec and non-Opec producers at the end of 2016 will hold. The second is how fast US shale producers will gobble up market share now that Brent crude once again costs $55 (£45) a barrel. Between 2011 and 2015 tight oil production increased from 1m to 4.5m barrels a day, but that period of growth has essentially been put on hold for the past two years by Opec-orchestrated oversupply. With prices now stabilising, this flexible yet cash-intensive form of production is once again starting to increase. You need only look at the Baker Hughes rig count, which, since hitting a nadir in May 2016, has seen the number of producing oil wells in the main basins rise every week. By Christmas, the count was 66 per cent off the bottom.
Few global energy investors have failed to notice that tight oil - the once-trapped sandstone oil now accessible through horizontal well drilling and hydraulic fracturing - is a highly leveraged bet. Not only did tight oil producers take on considerable debt in the boom years in order to fund new wells, but the industry's relatively high per-barrel cost means that valuations can quickly upgrade with small movements in the oil price. Of course, the opposite is also a permanent threat, and may prove the case if the Opec agreement arrives stillborn. But providing Saudi Arabia, Russia et al hold their nerve and reduce production in the coming months, they will be cheered by well owners in Texas and North Dakota.
