• 11 hours U.S. Oil Production To Increase in November As Rig Count Falls
  • 13 hours Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 15 hours Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 16 hours EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 18 hours Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 19 hours Aramco Says No Plans To Shelve IPO
  • 3 days Trump Passes Iran Nuclear Deal Back to Congress
  • 3 days Texas Shutters More Coal-Fired Plants
  • 4 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 4 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 4 days Chevron Quits Australian Deepwater Oil Exploration
  • 4 days Europe Braces For End Of Iran Nuclear Deal
  • 4 days Renewable Energy Startup Powering Native American Protest Camp
  • 4 days Husky Energy Set To Restart Pipeline
  • 4 days Russia, Morocco Sign String Of Energy And Military Deals
  • 5 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 5 days China Set To Continue Crude Oil Buying Spree, IEA Says
  • 5 days India Needs Help To Boost Oil Production
  • 5 days Shell Buys One Of Europe’s Largest EV Charging Networks
  • 5 days Oil Throwback: BP Is Bringing Back The Amoco Brand
  • 5 days Libyan Oil Output Covers 25% Of 2017 Budget Needs
  • 5 days District Judge Rules Dakota Access Can Continue Operating
  • 6 days Surprise Oil Inventory Build Shocks Markets
  • 6 days France’s Biggest Listed Bank To Stop Funding Shale, Oil Sands Projects
  • 6 days Syria’s Kurds Aim To Control Oil-Rich Areas
  • 6 days Chinese Teapots Create $5B JV To Compete With State Firms
  • 6 days Oil M&A Deals Set To Rise
  • 6 days South Sudan Tightens Oil Industry Security
  • 6 days Over 1 Million Bpd Remain Offline In Gulf Of Mexico
  • 6 days Turkmenistan To Spend $93-Billion On Oil And Gas Sector
  • 7 days Indian Hydrocarbon Projects Get $300 Billion Boost Over 10 Years
  • 7 days Record U.S. Crude Exports Squeeze North Sea Oil
  • 7 days Iraq Aims To Reopen Kirkuk-Turkey Oil Pipeline Bypassing Kurdistan
  • 7 days Supply Crunch To Lead To Oil Price Spike By 2020s, Expert Says
  • 7 days Saudi Arabia Ups November Oil Exports To 7-Million Bpd
  • 7 days Niger Delta State Looks To Break Free From Oil
  • 7 days Brazilian Conglomerate To Expand Into Renewables
  • 7 days Kurdish Independence Could Spark Civil War
  • 7 days Chevron, Total Waiting In The Wings As Shell Mulls Majnoon Exit
  • 8 days The Capital Of Coal Is Looking For Other Options

OPEC’s Announced Production Cuts Are A Big Deal

Oil tanker loading offshore

By now you have undoubtedly heard that late last month at OPEC’s 171st Ordinary Meeting in Vienna, the group announced that it would reduce output by about 1.2 million barrels per day (bpd) by January. This is the first announced output cut by the group in eight years. Saudi Arabia will bear ~40 percent of the cuts, with Iraq reducing output by nearly 20 percent. Nigeria and Libya were exempted from the cuts.

OPEC also secured agreements from non-OPEC members. Russia led this group of non-OPEC producers by agreeing in principle to cut production by about 300,000 bpd. Most of these non-OPEC cuts are symbolic, as many are in line with the natural production declines expected to be experienced by these countries.

The market response to the OPEC cuts was swift. Global prices for crude quickly jumped >10 percent to above $50/bbl. Shale oil producers surged across the board, with Continental Resources and Whiting Petroleum jumping 23 percent and 30 percent respectively.

For those who have argued that OPEC is a paper tiger, I would ask what other organization has the power to move the price of oil so dramatically? They may sometimes behave like a paper tiger, but they are capable of rapidly moving the global oil markets. That is real market power.

I have seen some suggest that this agreement is much ado about nothing, on the basis of two (valid) points. The first is that OPEC members historically cheat on their quotas.

This is true, and some members are likely to cheat this time. But keep in mind the underlying theme. OPEC has now made a strategic shift after their costly decision two years ago to defend market share. In announcing these cuts, what they are really saying is they are tired of living with low oil prices. That’s a big deal, because it is a strategy they will likely pursue for several years. It is also being driven by Saudi Arabia, and they usually get what they want within OPEC. Related: These Nations Lead The Renewables Revolution

While we may not get an accurate accounting of production in all OPEC countries, we will see the ongoing status of global crude oil inventories. We can gauge whether OPEC’s strategy is having success by whether crude oil inventories start to return to normal levels. And if they don’t start falling, expect to see more cuts.

The other valid point that is being made is that shale oil producers are likely to rush in and fill the gap from these cuts. This is certainly true to an extent. The question is to what extent they can do this. This isn’t like turning on the taps. It’s going to take some time to ramp up production. Meanwhile, OPEC will likely opt for more cuts should additional shale production negate their first round of cuts.

The total announced production cuts of OPEC and non-OPEC producers total about 1.8 million bpd. To fill that gap would require U.S. producers to reverse the 1 million bpd decline that took place in the U.S. over the past year, and add another 800,000 bpd. That may be doable, especially if oil prices surge much higher. But it will take time, and as time ticks away those sweet spots in the shale plays are depleting. U.S. shale production will peak eventually, and OPEC may risk defending price while waiting for that to happen. Related: Traders Most Bullish On Oil Since 2014

So it’s a gamble on OPEC’s side, just as deciding to defend market share two years ago was a gamble (which they lost). OPEC is likely betting that it can cut production more than the shale producers can increase production. If they had a crystal ball and knew U.S. oil production could increase to 20 million bpd (as Continental Resources CEO Harold Hamm recently claimed), then it would be clear that it’s a fruitless exercise.

If, on the other hand, they end up cutting production by 2-3 million bpd and non-OPEC producers are unable to close that gap, then the gamble will pay off. But OPEC can afford to play the long game. They collectively produce 42 percent of the world’s oil. More importantly, they control 71 percent of the world’s oil reserves. They know global demand is forecast to continue growing.

Regardless of whether shale oil producers can make up for the cuts, this OPEC announcement is a big deal. It is a wave of the white flag by OPEC, and likely a strategy shift that will last for years. And it’s hard to see anything but upside from this move for America’s shale oil industry.

By Robert Rapier via Energy Trend Insider

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Matthew Biddick on December 20 2016 said:
    Let's see. ExxonMobil just released their 2017 Outlook for Energy: A View to 2040. They forecast (and they're very good at forecasting, truly) a 25% increase in global energy demand by 2040, of which oil will still play the most prominent role, natural gas second. They claim it would be closer to 100% increase in demand except for anticipated efficiency gains in energy use. OPEC should cut whatever they need to cut to satisfy their monetary needs, and let the shale revolution run its course, which will primarily be in North America. This will take about 20 years or so. You know, when you're drilling shale/source rocks it means you're officially "scraping the bottom of the barrel" (ironic phrase in this case). OPEC will hold the hammer by 2040.

    I may be wrong, but I don't think the American shale experience can be duplicated just anywhere. It takes a combination of immense infrastructure, excellent rule of law, a reasonable regulatory environment , and hundreds of thousands of skilled trained people.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News