Oil production: shale off

US oil production appears to have peaked at last. So the world production glut and the attendant price weakness must be coming to an end, no?

No. It is true that the surge in oil production in the US over the past four years accounted for half of the world's oil supply growth over that span - about 7m new barrels a day. It is also true that there is some evidence of a production slowdown. Shale deposits require a lot of drilling rigs to keep production growing: after the initial rush of oil, shale wells quickly taper off. So traders keep a close eye on the number of active oil rigs. If the rig count declines, so should shale oil production. And the count has fallen by half since peaking in October, helping to explain a rally in oil prices off this year's low.

Yet production per rig has improved dramatically. According to the US Energy Information Agency, it has doubled in key shale regions over the past two years, and is still rising. That suggests that costs per barrel of oil are falling. Further, if the current surge in oil prices - which have gone from $46 to $64 since mid-January - continues, producers may well restart suspended projects (US rig maker Nabors' shares have rallied by a quarter in the last month).

Meanwhile, the rig count in Saudi Arabia, demoted to the world's third-largest producer, has increased to all-time highs over the past year. The Kingdom's oil production has risen by 700,000 barrels per day since December, Citi reckons. That increase equals over half of the oil produced in North Dakota's Bakken shale region. Add to this the steady seep from Canadian oil sands - another 170,000bpd added this year, BMO Capital Markets estimates.

US production may have slipped back, but not enough. The higher the oil price rises short term, the greater the likelihood that discipline among US shale producers breaks down, bringing oil prices right back down later this year. Stay nimble.

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