"Cat and Mouse" Game Between U.S. And OPEC Commences Now That Honeymoon Over Cutbacks Is Over

Thursday December 8, 2016

With this week's renewed wave of analytical criticism signifying that the honeymoon with the Organization for the Petroleum Exporting Countries (OPEC) cut back deal is over, now begins a game of cat and mouse between OPEC and U.S. shale rivals, according to Glencore.

Ivan Glasenberg, chief executive officer of the commodity trading giant, believes a 16 percent price rally over the past week has given U.S. players the opportunity to sell forward their production for 2017 and beyond, thus shoring up their resources against potential future price declines.

He said, "It's going to be a cat and mouse game between OPEC and shale oil in America," a situation compounded by the fact that the hedging puts a cap in a price rally for the future – which in turn means no cushion for higher cost producers.

Glasenberg added, "OPEC members will say, 'if you (raise output), we are going to ramp up production and push oil back down to $35' ... I hope shale in America will be responsible and realize what's happened and allow the higher oil price to be sustained."

Brandon Elliott, executive vice president of corporate development and strategy for U.S. shale producer Northern Oil & Gas, admitted to Reuters that his company has bolstered its hedges: "In some core Bakken areas, it's economical to drill in the $45-$55 WTI price; I would expect that as we lock in some of the low $50s, activity picks up a bit."

Bjarne Schieldrop, commodities analyst for SEB, credits OPEC for foreseeing what may lie ahead: "As such, they have been quite clever by only pledging a cut lasting six months to begin with; this tightens up the front end of the market.

"They don't want to offer shale oil producers a free lunch with the possibility of a guaranteed, high profitability for new projects through a high forward price."

Meanwhile, as analysts debate what U.S. producers might do in coming months, BP used one of the world's longest sea routes, seven tankers and a series of ship-to-ship transfers to transfer almost 3 million barrels of U.S. crude to customers across Asia, according to CNBC.

This pioneering effort, which only a half dozen companies have the capability of doing, supposedly reflects the desire among oil traders to develop new shipping routes to sell growing supplies of cheap U.S. product to the world's biggest consumers.

Trading house Trafigura is also exporting 2 million barrels of U.S. oil to Asia, and the incentive for these deliveries have reportedly risen in the wake of the OPEC deal to curb output: "OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Schieldrop.

Erik Nikolai Stavseth, shipping analyst for Arctic Securities, says more long-haul trades are likely: "As Middle East producers and Russia are due to cut their output, large crude buyers (in Asia)... will likely import an incremental amount."

Earlier this week, Glasenberg worried that if the U.S. shale industry is inspired to ramp up production in the wake of the OPEC deal, prices could drop to $35.