• 2 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 2 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 2 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 2 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 3 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 3 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 3 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 3 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 3 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 3 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 3 days Venezuelan Output Drops To 28-Year Low In 2017
  • 4 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 4 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 4 days Kinder Morgan Delays Trans Mountain Launch Again
  • 4 days Shell Inks Another Solar Deal
  • 4 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 5 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 5 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 5 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 5 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 5 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 5 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 5 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 5 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 5 days Norway Grants Record 75 New Offshore Exploration Leases
  • 5 days China’s Growing Appetite For Renewables
  • 6 days Chevron To Resume Drilling In Kurdistan
  • 6 days India Boosts Oil, Gas Resource Estimate Ahead Of Bidding Round
  • 6 days India’s Reliance Boosts Export Refinery Capacity By 30%
  • 6 days Nigeria Among Worst Performers In Electricity Supply
  • 6 days ELN Attacks Another Colombian Pipeline As Ceasefire Ceases
  • 6 days Shell Buys 43.8% Stake In Silicon Ranch Solar
  • 6 days Saudis To Award Nuclear Power Contracts In December
  • 7 days Shell Approves Its First North Sea Oil Project In Six Years
  • 7 days China Unlikely To Maintain Record Oil Product Exports
  • 7 days Australia Solar Power Additions Hit Record In 2017
  • 7 days Morocco Prepares $4.6B Gas Project Tender
  • 7 days Iranian Oil Tanker Sinks After Second Explosion
  • 9 days Russia To Discuss Possible Exit From OPEC Deal
  • 9 days Iranian Oil Tanker Drifts Into Japanese Waters As Fires Rage On
Alt Text

Oil Rig Count Declines Amid Falling Prices

The U.S. oil rig count…

Alt Text

UAE Oil Minister: OPEC Deal Could Extend Beyond 2018

UAE Oil Minister al-Mazrouei has…

Alt Text

A Rare High-Profile Utility Takeover

Dominion Energy, Virginia’s largest utility…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

OPEC’s Impossible Task

OPEC

OPEC is on the verge of extending its production cuts for an additional nine months, pushing the deal through the end of 2018. But the determination to keep the cuts in place comes at the same time that U.S. shale seems to be accelerating in response to higher oil prices.

It’s an impossible tension that OPEC has to deal with. Hesitate on cuts and risk another slide in oil prices, or keep the cuts in place and offer more room to U.S. shale?

OPEC has tried to send a signal to the oil market that the group is operating with a consensus, and it telegraphed its intentions ahead of time to inspire confidence in the group’s cohesion. By demonstrating such resolve, the logic seems to be, the oil market would continue to tighten and prices would remain stable.

But the downside of such a strategy is that it isn’t just oil traders who are confident in a more balanced oil market – U.S. shale has kicked drilling into a higher gear recently, and appears poised to continue to ratchet up production. The rig count has climbed for several consecutive weeks, and U.S. oil production is on the brink of hitting an all-time record high.

The difficulty for OPEC, as Bloomberg Gadfly notes, is that the estimates for how much supply the U.S. will add next year differ by a wide margin. The IEA predicts non-OPEC supply growth by about 1.4 million barrels per day (mb/d) in 2018, a massive sum that would overwhelm demand. In this view, the OPEC cuts are badly needed to avoid another price collapse. OPEC is more hopeful that the shale industry will struggle; the cartel only predicts non-OPEC supply growth of less than 900,000 bpd next year. Related: The Petrodollar’s Biggest Challengers

There are plenty of signs to suggest that the shale industry is indeed facing unexpected troubles. But the problem for OPEC is that it simply can’t forecast with any accuracy what to expect from shale drillers over the next year.

Nevertheless, the objective of the OPEC production limits is to drain global crude inventories back down to average levels, a goal that will take more time to reach. With that in mind, it would make sense that the group locks in an extension of the agreement in a few days’ time.

But while there are some warning OPEC about a shale comeback, there are also voices that are warning OPEC that it could be doing too much. Brent is already safely in $60-per-barrel territory, and extending the cuts through next year could push prices up even more. “I’m used to OPEC not doing enough,” Rainer Seele, CEO of OMV AG, said in an interview with the Wall Street Journal. “Now they are over-delivering.”

Higher prices might be the result. “There’s actually a chance the market will over-tighten and prices go close to $70 soon,” Doug King, chief investment officer of the Merchant Commodity hedge fund, told the WSJ. At those prices, analysts worry about demand destruction. Related: How Many Barrels Of Oil Are Needed To Mine One Bitcoin?

The tricky thing for OPEC is that there isn’t much of a middle ground. OPEC is “also vulnerable if they don’t extend, that will spook the market,” Doug King said to the WSJ. There are risks for both keeping the cuts in place and letting them expire.

But because of the threat of an immediate price collapse, it is difficult to see how OPEC exits from its production limits. “Now that they’re in it, I don’t see how they get out of it,” Mike Wittner, head of oil market research at Societe Generale, told Bloomberg. “They need to continue supply management for the foreseeable future.”

An exit from the production limits will probably only become palatable when the oil market is much tighter – inventories at average levels, either a supply/demand balance or a slight deficit, and higher prices. In that context, especially with Saudi Arabia queuing up an IPO of Saudi Aramco, OPEC will likely err on the side of overtightening and allowing U.S. shale to come back more forcefully. The only question, at this point, is if Russia is on board.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Dan White on November 27 2017 said:
    You have to have big co-hones to bet against OPEC.


    Shale is a big lie, it is a media weapon to combat high oil prices. Look at the SPR, it keeps shrinking and shrinking. Remember when Trump took office he said he wanted to sell half the SPR, that is because it is probably already gone just not yet fully reported.
  • Kr55 on November 27 2017 said:
    Their first step would be to ignore the IEA because the IEA's numbers for supply and demand have proven to be garbage for many consecutive years. Then, do their own analysis as they collectively know more about the industry than anyone, and even more about shale than most shale players as they have been buying up technology at bargain basement prices during the crash. Then, decide what is best.
  • Nuggy on November 27 2017 said:
    I think they will take the shale bluff all the way. I doubt they will continue to give it away for next to nothing.

    Right now you got the Venezuela slow down and the Canadian pipeline break down. I think the EIA will inflate shale numbers again this week to keep the price from going into the $100 bbls range.
  • TM on November 28 2017 said:
    All the comments criticizing this article show a desperate need for higher oil prices. In my opinion, all these guys have bet on higher oil prices and thereby anything that goes their permanent wishful thinking "must" be wrong (because they say so and otherwise they will lose money). The truth is OPEC is in a desperate situation and it's only chance to keep influencing oil prices is to keep alive the agreements with non-OPEC relevant producers like Russia. But that can't last forever.

Leave a comment




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