When OPEC announced a deal in 2016 for production cuts of about 1.8 million barrels per day, U.S. producers were quick to fill the void, pushing down oil prices in the process. With the cartel extending its cuts through 2018, the Americans are more likely to stage a repeat that puts a ceiling on prices than to keep output steady, industry observers said.
There is little motivation for U.S. producers, particularly in Texas, to stop production increases with oil prices close to $60 per barrel, far above the trough of early 2016, according to Texas-based energy economist Karr Ingham. He said he could think of "no mechanism" that would artificially limit U.S. production and keep prices on the upswing.
OPEC announced at its Nov. 30 meeting that it and allied producers would extend the cuts through 2018, even as it sees "the market's gradual move towards a more balanced condition," Saudi Energy Minister Khalid al-Falih said.
Saudi Energy Minister Khalid al-Falih announced at the cartel's latest meeting that OPEC would continue its production cuts through 2018. Credit: The Associated Press |
It was OPEC's desire for balance, which was also an effort to crush independent U.S. shale producers, that sparked the oil and gas price collapse that began in 2014 and lasted into 2016. Now the cartel has gone in a different direction, cutting back instead of flooding the market as it did in 2014. The market appears to anticipate U.S. production increasing in response.
OPEC's latest move "bends a knee to shale,” said analysts at Sanford C. Bernstein & Co. LLC. They have already adjusted their forecasts to add 1 million barrels per day of production through 2021, with West Texas' Permian Basin responsible for more than half of the increase.
Simple market economics will push U.S. producers to pick up production, Ingham said. Even if Texas pulls back on production, unless those cuts are dramatic, there would be little to no effect on prices. Drillers would simply be producing fewer barrels at a price that did not go up, pushing their revenue down. "Why would they do that?" he said. "Producers of crude oil, natural gas — or anything else, for that matter — in a market economy make decisions in their own individual self-interest, not in the interest of a greater objective."
The question of whether U.S. drillers will restrain production "suggests that ... producers would be wise to collectively take some action to keep a lid on production growth in the interest of a greater good of some sort, namely keeping supply in check to provide upside support to prices," Ingham said. "And that's just not the way that works."
In its review of the latest OPEC meeting in Vienna, Barclays said U.S. producers have already benefited from the cartel's initial cutbacks and will continue to do so.
"US crude oil production increased nearly [300,000 barrels per day month over month] and is now more than 900 kb/d above September 2016 levels. At current prices, producers will likely continue to put rigs back to work and drive output higher. We forecast US production to grow by another [1 million barrels per day] before 2018 end, but there is clear upside risk to this forecast if current oil prices persist," the firm said. Barclays added a comment that indicated that OPEC still may not fully understand U.S. conventional drillers. "Similar to the June meeting, we think Khalid Al-Falih's comments ... suggest he may misunderstand what US producers are capable of at current price levels."
While OPEC may not understand the full capability of U.S. independent producers, it seems to understand the need for money to fund operations. Jim Krane, a professor at Rice University's Baker Institute, said OPEC is interested in getting the attention of those supplying capital to shale drillers.
"That's the key of one of the statements coming from OPEC: They want to discourage investors in the West from supporting more shale oil production. They want them to think that by the time those investments take hold in a few months, it won't be as profitable [due to overproduction]," he said. "Some of the institutions that fund new oil production are starting to show signs of pulling back and being less eager to fund production. It looks like there's some signs that banks and other investors aren't as keen to fund new production."

