"Swing Producer" OPEC Back in Business But Must Co-Exist With U.S. Shale: Analysts

Monday May 29, 2017

Widely perceived by those focused on fundamentals as disappointing, the Organization of the Petroleum Exporting Countries' (OPEC) formal agreement to extend its production cutback initiative at the same rate seems to be earning better appraisal a day after it was announced, with one expert predicting it will be enough to reduce inventories to their five year average at the end of this year.

Rob Thummel, managing director of Tortoise Capital Advisors, told CNBC that the market "really underappreciated" OPEC's announcement on May 25 and that it will soon see its positive effects, with inventories declining: "Ultimately we're going to end up at the end of the year with global inventories at their five year average; we haven't been there in a couple of years, so I think that's going to be a very positive thing for oil prices, and we're going to see oil prices move higher as a result of that."

Thummel went on to speculate that OPEC members need oil prices to be higher than they are now, therefore this will provide enough incentive to ensure compliance moving ahead.

Meanwhile, Suhail bin Mohammed al-Mazroui, energy minister for the United Arab Emirates, stated that the output cut extension "will help motivate balance of the market" and encourage investments in the oil sector.

OPEC and some non-member producers on Thursday agreed to extend a pledge to cut around 1.8 million barrels per day (bpd) of output until the end of the first quarter of 2018.

But there's no denying the very real challenges an extension at the same cutback rate poses, the main one being the resurgence of U.S. shale and the likelihood the extension will motivate American producers to pump even more than they are doing now.

Nelson Martinez, oil minister for Venezuela, told Reuters, "In terms of the threat, we still don't know how much (U.S. shale) will be producing in the near future."

To which Khalid al-Falih, energy minister for Saudi Arabia, added, "We have to co-exist."

One way co-existence might be achieved is the emerging strength of markets such as India, which this week said it is looking to the U.S. for greater supply: Dharmendra Pradhan, that country's energy minister, said, "The new normal has to be accepted."

Indeed, Daniel Yergin, a leading oil analyst, told CNBC that "I think OPEC is actually back in business [but] as a swing producer ... it's almost a different industry than it was three years ago."

Friday's analytical voices were a marked contrast from just 24 hours prior, when experts such as Konstantinos Venetis, senior economist at TS Lambert, said "OPEC's action should best be viewed as a defensive supply 'taper' in the hope of better demand."