Venezuela’s output has fallen by about 500,000 barrels a day this year and could drop by the same amount by year’s end, Essner said. Meanwhile, U.S. drillers would struggle to boost output by more than 1.2 million barrels a day.
“So we need every last barrel of those supplies to take us to where we need to balance the market,” Essner said.
Underscoring Essner’s point, oil futures reversed some of their losses on Thursday after weekly data showed a big drop in U.S. crude inventories.
American drillers that specialize in freeing crude oil from shale rock formations are facing worker shortages and limited pipeline capacity in western Texas. At the same time, these drillers are focused on returning value to their shareholders, rather than plowing revenue into new production.
“Shale is not Superman,” Helima Croft, global head of commodities strategy at RBC Capital Markets, told CNBC earlier in the week.
Shale drillers face yet another hurdle to upping output, according to Essner. Many agreed to deliver oil to customers at prices far below today’s levels — a practice known as hedging — and set capital spending plans assuming prices would average about $60 this year.
“They’re sort of locked in, and when you look at the slope of the futures curve, it’s going downward. That makes it harder to hedge production at attractive prices for further-out years,” Essner said.
Oil prices are likely to settle around $70 per barrel, said Essner, who believes futures rose to that level largely on supply-and-demand fundamentals.