What Is The Real Reason For OPEC’s Continuous Efforts to Improve Oil Price by Production Cuts When It Is Clear That Isolated Efforts Are Unlikely To Be Effective.

In my comments to the Article published by Business Insider regarding signs that OPEC’s would most likely to extend production cuts agreement, I indicated that efforts of OPEC alone are unlikely to lead to improvement of crude oil prices. Even if some initial positive results would follow the OPEC’s final decision, in my opinion, it could be mostly due to markets sentiments rather than shift in fundamentals which shall be in place to ensure long-term solution.  

Since the US shale oil producers are not part of this effort, it is unreasonable to expect that any results produced by the final decision of OPEC to extend the agreement of production cuts are sustainable.

My view is in line with Robert Rapier’s opinion which he expressed in his Article “How Quickly Could U.S.Producers Offset OPEC-Led Production Cuts?” published by Forbes. 

He highlights that OPEC agreement to cut production is ineffective due to two factors. The first is simply that OPEC members will cheat, as they have historically done. But the second factor is that U.S. shale oil producers will simply ramp up production as oil prices rise, negating the OPEC cuts.

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According to the Inside Sources the shale revolution has enabled U.S. producers to invest in and begin — or restart — production more flexibly. Drilling new wells, reopening capped wells and bringing additional production online can now be accomplished in a matter of weeks, at lower costs. 

JPMorgan’s head of regional oil and gas for Asia Pacific Scott Darling predicts that in the second half 2017, US shale could add 200,000 barrels per day with prices at $50, up to as much as 1 million barrels per day if prices rise above $60.

The latest Drilling Productivity Report of EIA provides further evidence that U.S. shale is responding to higher prices brought on by output cuts by OPEC and other major crude-producing nations.

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The Permian Basin, of west Texas and southeastern New Mexico, once again accounts for the lion’s share of the production gains. EIA expects drillers to raise production by 70,000 barrels a day in April.

Drillers in the Eagle Ford region of southeast Texas are pumping more, as well. The region is set to increase output by 28,000 barrels a day next month, EIA said. In its last forecast, Eagle Ford producers were seen upping production by 14,000 barrels a day.

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Production growth is expected to decline in April in Colorado’s Niobrara region, to 11,000 barrels a day. Production in North Dakota’s Bakken Shale is seen declining by 10,000 barrels per day.

The EIA data forecasts recent and near-term drilling activity in seven major oil-producing regions that have driven about 90 percent of U.S. output growth in recent years.

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It is clear that there is solid consensus among the majority of oil and gas industry’s representatives. However, what is confusing me why OPEC continues to improve crude oil prices by acting in isolation?

Perhaps, synchronised actions of oil producers of OPEC member countries, the US market is fragmented which complicates the issue. However, the core reason might be behind public display. Is this possible that initiated price war years ago actually is ongoing?

It is given that the US oil companies are quick to react to increase of oil prices. This flexibility is likely to keep the oil price surpressed. With rising concern of oil and gas companies’ ability to meet their debt obligations, less generated cash and more expensive debt (due to the rates hike) could put some of them out of business. 

It might not be the true reason. But if it is not, I have difficulty to explain OPEC’s continuous efforts to impliment inefficient measures.

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