Economy

Oil producers to keep up squeeze regardless of Russian Federation considerations

Oil producers to keep up squeeze regardless of Russian Federation considerations

Traders pushed crude prices higher on the news that two major OPEC producers - Libya and Nigeria - agreed to cap output at current levels, joining the coalition's deal to cut production by 1.8 million barrels a day through the end of next year. It won't really change the supply/demand balance as it now is, though it could prevent new supply from hitting the market in 2018 from those two countries.

Still, the OPEC extension "adds confidence in higher oil prices", according to Sanford Bernstein's team led by Oswald Clint and Bob Brackett.

While such an arrangement looks bright for the oil patch heading into 2018, and psyches up energy investors who expect a sharp rebound in oil prices, the surging US output will remain a concern.

Bloomberg notes that while the production deal has helped to elevate prices, it creates a "quandary" for OPEC and allied producers about how to keep those prices high without igniting even greater shale growth. "The job is not done", Khaled al-Falih, Saudi Arabia's energy minister, said Wednesday. "Unfortunately, a prolonged ramp-up in 2017 meant that we are only now starting to see the full affects of this year's drilling activity on production levels".

Commenting on OPEC's decision, Viktor Nossek, director of research at WisdomTree in Europe, said, "OPEC's decision to extend the production cut comes as no surprise, with markets already pricing it in earlier today".

Benchmark crude prices are now close to $60 a barrel, up nearly 20 percent since a year ago, when the Organization of the Petroleum Exporting Countries and their non-OPEC partners agreed to reduce supply by a daily 1.8 million barrels. Since OPEC began cutting production in January, the amount of oil stored in developed nations has dropped from 338 million barrels above historically normal levels to 138 million barrels.

Some analysts say that the Saudis have underestimated shale's threat.

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VIENNA, Dec 1 (Reuters) - U.S. shale oil producers and OPEC appear to have called a truce of sorts even though there is no sign the U.S. industry will do anything to help reduce the global oil supply glut.

"I hope that all USA shale companies will maintain their current rig counts and use all excess cash flow to increase dividends back to their shareholders", he said. USA oil production jumped by 290,000 barrels a day in September - an increase of 3% from August - a sign that companies were quick to respond when US prices climbed back above $50 a barrel.

"Combined, these point to potentially even greater backwardation than we now project through 2018 although with lower deferred prices", the analysts said, referring to a market structure where near-term futures are costlier than later contracts. Non-OPEC compliance was 107% during the month and 81% year-to-date.

Two other sources made similar remarks. Analysts also expect to see more natural gas liquids produced for USA ethane crackers next year, meaning domestic supply could increase even more.

I believe the key takeaways in the extension is that countries involved in the deal will be keeping an eye on price levels and on USA production and will be willing to take steps to prevent prices from rising too high, too fast.

"Based on estimates, the extension of the production adjustments will facilitate the oil market to rebalance itself by end- 2018. Stated differently, perhaps now is the time to sell the OPEC strangle".


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