On May 25, OPEC and its allies extended oil production cuts for nine more months after last year’s agreement failed to eliminate global oversupply and attain a sustained price recovery.
The supply cuts being extended amount to nearly 1.8 million barrels a day, 1.2 million by OPEC members and the remainder by 11 non-OPEC countries.
While markets were largely unimpressed with the extension, rewarding the oil producers with a temporary crude price drop to below $50 per barrel, IHS Markit senior director Bhushan Bahree said the extension proved the strength of the alliance between OPEC leader Saudi Arabia and non-OPEC leader Russia and their respective allies.
“The alliance of OPEC and non-OPEC producers is proving to be durable. It had seemed improbable a year ago after the ‘sudden death’ in Doha, Qatar of a previous attempt at a production freeze by OPEC and non-OPEC countries,” Bahree reported in an IHS analysis of the deal’s extension to March 2018
And that date “need not be a hard stop,” he said. “While no exit strategy is laid down, Saudi oil minister Khalid al-Falih with Russian oil minister Alexander Novak by his side indicated that the alliance intended to deal flexibly with whatever situation arose, implying that the extent and duration of the cuts arrangement was dependent on market balancing and price imperatives.”
OPEC and its non-OPEC partners will meet again Nov. 30 in Vienna.
Yergin agrees
Pulitzer Prize-winning author and Vice-chairman of IHS Markit Daniel Yergin agreed with Bahree.
“I think OPEC is actually back in business as a swing producer,” the leading oil analyst told reporters after the extension was announced.
The greatest challenge facing price stability is so-called U.S. shale output, which in recent years has put the U.S. in the world’s top three producers with Saudi Arabia and Russia.
“So-called” because in many producing regions, such as the Bakken, the oil is not necessarily produced from shale: It would be more appropriate to refer to it as tight oil production.
But whatever the terminology, this unconventional output has soared in the last five years.
Oil producers around the world are trying to adapt to a new global reality in which U.S. shale output is profitable at $40 to $50 a barrel, Yergin said.
Since June 2014 when oil prices began to fall, technological advances have played a large part in making U.S. shale profitable at lower price levels, he said, and the OPEC-Russia alliance is feeling the pressure.
IHS Markit projects that annual average crude oil production in the U.S. and Canada will rise by 1.6 million barrels per day between 2016 and 2018, an offsetting factor for the cuts being made by OPEC and its non-OPEC partners. 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.
Shale 2.0
“When the prices started down, there was this widespread thinking $70 to $80. But it’s been so innovative. It’s almost like we’re looking at Shale 2.0. It’s almost a different industry than it was three years ago,” Yergin told CNBC.
West Texas Intermediate crude began tanking that June from about $108 a barrel to less than $27 by early 2016.
Prices have recovered since then, generally staying at, or above, $50 since the November 2016 OPEC cut was first announced.
“Next year we actually think U.S. oil production won’t increase as much because they’ve increased so much this year,” Yergin told CNBC. “I think that’s the kind of viewpoint OPEC took - that they’ve got to run this thing into next year.”
Barclays’ chief positive on price
Michael Cohen, head of energy markets research at Barclays, attributed the May 25 price drop to $49 to the market looking for “the icing on the cake,” such as larger production cuts or export limits.
“When those things weren’t included, then this kind of movement happens. (But) we remain constructive on oil prices for (the) next couple months as inventories draw down,” he told CNBC.
OPEC hunkering down
“OPEC and its partners are hunkering down for an extended price defense,” Bahree said in the IHS analysis.
“After all is said and done, revenues are what matter to oil exporters and they do not want to see prices drop below $50/b, their line in the sand at this time.”
Price spike in cards?
Is a super spike in oil even possible anymore?
Yergin told CNBC it was less likely than it had been before U.S. shale production gained so much traction in the market.
But it was possible, he said, if there was a “big disruption” in supply.
