OPEC extension a win-win, even for U.S. shale oil producers

OPEC economists in October said anything above $55 per barrel for WTI would stimulate U.S. shale and the benchmark was about $3 above that early Friday.
By Daniel J. Graeber  |  Dec. 1, 2017 at 6:18 AM
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Dec. 1 (UPI) -- A move by parties to an OPEC-led agreement to extend a production cut deal to the end of 2018 is a win-win, including for U.S. shale oil players, analysts said.

Ministers from the Organization of Petroleum Exporting Countries and a handful of non-member states, notably Russia, agreed Thursday to extend an agreement that sidelines the equivalent of about 2 percent of total global demand for crude oil through the end of next year.

The agreement, implemented in January and meant expire in March, is designed to drain the surplus on the five-year average for global crude oil inventories and Saudi Oil Minister Khalid al-Falih said parties are about halfway to their goal of balance. Tacitly, the effort helped established a floor under crude oil prices of around $50 per barrel.

OPEC economists said in their market report for October that the price for West Texas Intermediate, the U.S. benchmark for the price of oil, could be in a range between $50 per barrel and $55 per barrel for 2018. Anything higher than that would likely encourage U.S. oil producers to expand their drilling activities, they said.

WTI was making a run at $58 per barrel early Friday.

"In agreeing to extend current production quotas OPEC and non-OPEC nations are managing a fine balance which is likely to maintain prices at current levels in the near term," Chris Midgley, the head of analytics at commodity pricing group S&P Global Platts said in an emailed statement.

U.S. shale oil production has proven more resilient to lower crude oil prices than initially expected. While OPEC ministers were debating the fate of the agreement in Vienna, the U.S. Energy Information Administration said September crude oil production was 9.48 million barrels per day, a 3.2 percent increase from August and a 10.8 percent increase year-on-year.

Big shale oil producers showed marked gains from August, with North Dakota and Texas posting double digit gains. Even offshore gained, with EIA data showing a 9.9 percent increase from last year to 1.65 million bpd in September.

"Talk about crashing the party," Joe McMonigle, a senior energy analyst at Hedgeye Risk Management who attended the meeting in Vienna, said in commentary emailed to UPI. "OPEC's win-win may also be a win for U.S. shale producers."

For OPEC members and Russia, the extension saved faced as the nine-month duration was largely baked into the market by this point. A nod to a June review, however, gives major producers like Russia some flexibility.

Ann-Louise Hittle, head of the Macro Oils division at analysis group Wood Mackenzie, said the June review was a "potential escape clause," which largely erased a morning rally in crude oil prices Thursday.

"The OPEC and non-OPEC agreement to keep the current production restraint in place through 2018 matches Wood Mackenzie's base case assumption for our price forecast," she said in comments emailed from Vienna.

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