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Why OPEC Will Put The Brakes On At $60 Oil

OPEC says a price near $60 will avoid added shale production

Recently renewed talks of a production freeze among OPEC and some non-OPEC producers including Russia have helped to bolster the price of oil in recent weeks, but the organization may not try to raise oil prices beyond $60 per barrel for fear of a renewed glut.

On Monday, Russian Energy Minister Alexander Novak and his Saudi Arabian counterpart, Khalid al-Falih, met on the sidelines of the Group of 20 summit in China. A joint statement released by the ministers said “there is an imperative to mitigate excessive volatility harmful to global economic stability and growth.” To that end, the ministers agreed to “act jointly or with other producers,” to help stabilize the price, and have agreed to a Russian-Saudi task force on oil and gas, which will meet in October.

Novak mentioned a production freeze was one possible solution for stabilizing markets. His Saudi counterpart said that a freeze was not the only option, although he declined to elaborate what other tactics the two countries might consider.

Afraid of shale uptick: OPEC unlikely to make significant cuts to production

OPEC members will likely be very cautious in trying to increase the price of oil, however. The group would like to see the price of oil increase, but they do not want to send prices so high that North American shale producers will lift their output. The result, officials from members of OPEC told The Wall Street Journal, is that the group is unlikely to make significant cuts to production when it meets on September 26.

After meeting with OPEC secretary-general Mohammed Barkindo on Tuesday, Iran’s oil minister Bijan Zanganeh said he and others in OPEC are hoping to get the oil price between $50 and $60 a barrel—higher than today’s $47 or so, but low enough to keep “rivals from raising their output,” the ministry said. Related: How The Hanjin Bankruptcy Could Impact Oil Prices

Previously, OPEC members like Algeria and Venezuela were pushing for prices near $70 per barrel, but some members have begun to temper their expectations. Venezuela continues to push for a price near $70, but Algeria’s oil minister, Noureddine Bouterfa, said OPEC is aiming for prices between $50 and $60 after meeting with Zanganeh over the weekend.

The dropping price targets reflect the U.S. shale-oil industry’s unexpected resilience. Some OPEC countries had earlier expected many U.S. shale producers to cut production when oil dropped to $50 a barrel, a Middle Eastern OPEC delegate said. But U.S. shale has “surprised us, and can surprise us again,” the official said.

Shale producers need prices above $60 to launch significant new production, Swiss oil consultant Olivier Jakob wrote in a note Tuesday. Within OPEC, “there is no interest to push crude oil prices” above that level, he wrote, since doing so could spark a new glut that could drive prices down all over again.

By Oil & Gas 360

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  • Kr55 on September 11 2016 said:
    Eagle Ford and the Bakken are definitely the concerns. Those are the places where production can explode. The Permian is much slower. The little test run oil did to 52 showed that the Bakken and Eagle Ford were still paralyzed, even with those prices. I can see OPEC wanting to test the waters in mid-high 50's now.
  • Joe on September 12 2016 said:
    The only way for Opec to put the brakes on is to flood the market with oil. I don't believe they have the capability any more. The U.S. does.

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