Record Rising U.S. Oil production Will Continue to Offset OPEC Cutbacks

by Ship & Bunker News Team
Monday February 27, 2017

It's no secret that rising oil production from a variety of countries will continue to offset the cutbacks achieved by the Organization of the Petroleum Exporting Countries (OPEC) under its cutback agreement, but Canadian media is portraying the near future as being a "tug of war" between the cartel and the U.S.

CBC News reports that American production has topped 9 million barrels per day (bpd) for the first time in 10 months, up a half million barrels per day since September, "and that really sums up the tug of war between the U.S and the oil cartel: it shows that OPEC doesn't really control the oil market anymore."

Jim Burkhard, head of global oil markets research with IHS Energy, remarked that while OPEC has been successful at boosting market psychology and confidence that their cuts will impact the supply glut, "With every OPEC action, there is a reaction; it may take time, but in the months ahead the reaction will be growth in U.S. oil production."

Burkhard thinks U.S. producers will add a further 600,000 bpd to its output under the administration of president Donald Trump, who is easing regulations in the energy sector; and of the possible reaction to this by Saudi Arabia and other OPEC members, he says, "It is going to be a real question: do they feel that they need to cut again?

"The price environment in the week or two before the meeting will have an outsized influence on what is decided" (Burkhard is referring to the meeting by cartel members this spring to decide if the cutback agreement should be extended until the end of 2017).

While the report added to the now voluminous wave of negative speculation with regards to the ultimate outcome of OPEC's oil reduction strategy, West Texas Intermediate on Friday settled down 46 cents at $53.99 per barrel, and Brent dropped 58 cents to $56 per barrel.

LBBW has cut its year-end Brent price forecast by $5 to $55 a barrel, based on the continued growth in U.S. production and oil prices that seem to have reached a technical ceiling; Frank Klumpp, oil analyst for LBBW, noted,  "Most market participants realize that the good news from OPEC seems to be priced in; therefore, and because of the shale comeback (in the U.S.), we reduced our forecast."

In other words, despite OPEC's average compliance at a record 90 percent in January and compliance by non-members at 60 percent, there is arguably very little the cartel can do to lift prices as it had stated upon embarking on the cutbacks.

Last week, Mark Watkins, regional investment manager at U.S. Bank Private Client Group, pointed out that while the prospect of OPEC extending its agreement by another six months may be encouraging, "one of the issues is if you look at OPEC and other members basically reducing their supply and U.S. shale producers profiting from it, that's going to produce some turmoil.

"At some point, it's going to be difficult for that agreement to stay in place when member countries can drill more and make more money."