Americas News
OPEC Deal Could be Good News for U.S. Drillers, Which May Also Cause Output Deal To Unravel: Analysts
With a effective floor of $50 per barrel expected as a result of the Organization of the Petroleum Exporting Countries (OPEC) unexpectedly agreeing to reduce output to 32.5 million barrels per day (bpd) on Wednesday, U.S. shale companies are anticipating a rebound in operations – but analysts are reiterating the concern that the rebound will shatter the shaky truce on prices.
Although final details of the agreement won't be made public until after the official OPEC meeting in November in Vienna (where it will also be determined which members will actually cut production), U.S. benchmark crude rose over 5 percent to $47 per barrel on Wednesday and then over 1 percent on Thursday to near $48.
But given that the deal is only in the preliminary stages, Bank of America Merrill Lynch and Citigroup note that if prices continue to climb even moderately, more U.S. drillers will be inclined to put rigs back in operation, and thus, in an entirely predictable Catch-22, add more supply to the oversupplied market and cause prices to plummet again – and perhaps compel OPEC members to reconsider their agreement.
Indeed, Reuters reports that companies such as Anadarko Petroleum Corp, EOG Resources Inc, Apache Corp, and dozens of other firms have proven they can withstand $40 oil and profitably drill new wells as oil climbs to $60 a barrel.
Bank of America analysts pointed out that flow rates in areas of Texas/New Mexico Permian Basin have improved in recent months, which means drillers are extracting more oil with better technology: "Worryingly for the cartel, production in the West Texas region has already started to increase sequentially.
"Stated differently, OPEC has declared a truce on oil prices, but relentless improvements in shale technology will keep Saudis awake at night wondering if they have made the right choice."
Citigroup analysts echoed that sentiment, adding, "Absent a demand driven move, we still think a rather range-bound oil market is in store for us more medium term."
Both parties are maintaining their outlook of Brent averaging $61 per barrel in 2017, and Bank of America thinks prices might slightly exceed $70 by the second quarter of next year.
As problematic as this week's agreement may be, it is still being viewed as a long-awaited capitulation by OPEC and a testament to the resiliency of the U.S. producers who have suffered the brunt of the cartel's record breaking collective output.
James West, partner at Evercore ISI, told Reuters, "This gives U.S. producers more confidence; they may become a touch more aggressive than they had planned to be."
When the agreement was announced on Wednesday, Michael Wittner, global head of oil research at Societe Generale, said,"This could potentially be very significant, not for the barrels that could be removed from the market, but because it's a signal that the Saudis could be returning to active supply management."
