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OPEC, non-OPEC alliance not strong enough to limit North America

There's no governing factor that would artificially limit the recovery for the United States and Canada.

By
Daniel J. Graeber
An alliance between OPEC and a handful of other producers is strong, but not strong enough to curb the recovery in the North American energy sector. File photo by Gary C. Caskey/UPI.
An alliance between OPEC and a handful of other producers is strong, but not strong enough to curb the recovery in the North American energy sector. File photo by Gary C. Caskey/UPI. | License Photo

May 26 (UPI) -- The alliance between OPEC and non-OPEC producers is strong, but not strong enough to derail production momentum from North America, analysis finds.

Parties to a multilateral agreement that sidelined about 1.8 million barrels per day said Thursday the deal would continue into March 2018, three months longer than originally planned. The extension was teased out more than a week ago when it was proposed first by Saudi Arabia and Russia, the largest contributor to the production cut that's not a member of the Organization of Petroleum Exporting Countries.

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"The deal's extension for nine months now underlines the durable nature of the current understanding between Saudi Arabia and Russia, two of the world's three largest producers of oil, a group that includes the United States," Bhushan Bahree, a senior analyst for IHS Markit, said in an emailed statement.

The production arrangement counts on contributions from a handful of other producers outside OPEC, apart from Russia. Kazakhstan, Mexico and Azerbaijan are among the larger non-member contributors and the deal, Bahree said, underscores the strength of the relationship between OPEC and other producers.

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The deal is aimed at restoring balance to a market flush with oil. When unveiled in December, it helped establish a floor under crude oil prices of around $50 per barrel, though that level has come under threat from the subsequent market recovery in North America.

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Michael Wittner, the global head of oil research for Societe Generale, said in a report emailed before the OPEC announcement that bullish market conditions were supported by a steady draw on commercial crude oil inventories in the United States, the world's leading economy. Crude oil prices were trending higher ahead of Thursday's meeting in Vienna and the U.S. shale oil sector was responding, reaching 9.3 million barrels per day last week, up 5.8 percent year-on-year.

IHS said the resiliency of U.S. shale oil production to crude oil prices that are still about half what they were three years ago is a challenge for the OPEC-led management effort because there's no central governing mechanism in place to limit output. The consultant group said it expects total U.S. and Canadian oil production will rise by almost as much as was sidelined by OPEC and its non-OPEC partners.

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"Output in the U.S. alone is projected by IHS Markit to rise by more than 900,000 bpd from the beginning of 2017 to the end of the year," Bahree said.

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