Crude Economics
OPEC’s Cuts Aren’t Working (Yet)

When petrostates both inside and out of OPEC agreed last November to cut their collective production, the hope was that a reduction in supply might erase the global glut of crude that led to the collapse in oil prices over the past 31 months and would, in turn, send prices rocketing back up.

At present, however, those heady days of $100+ per barrel crude are looking downright unobtainable. While OPEC seems to be following through on its stated plan of reducing output, prices aren’t jumping in response. As Reuters reports, petrostates do seem to be making the cuts they promised:

The Organization of the Petroleum Exporting Countries is cutting its output by 1.2 million bpd from Jan. 1 — its first such deal since 2008 — to prop up oil prices. “OPEC supply is on track to decrease by 900,000 bpd in January, suggesting a high level of compliance thus far into the production curtailment agreement,” Daniel Gerber, chief executive of Petro-Logistics, said in an email.

There was some doubt that the cartel would walk the walk after talking all of its talk in 2016. It seems now that OPEC is, in fact, cutting production according to plan, but prices are staying relatively flat—Brent crude prices have stayed in the low- to mid-$50 range since early December.

What’s happening, then? Well, as Reuters explains, petrostate cuts are being offset by surging U.S. production:

The U.S. weekly oil and gas rig count from Baker Hughes showed that U.S. drillers added 15 oil rigs in the week, the 12th gain in 13 weeks. That brought the total count to 566, the most since November 2015…U.S. oil production has been rising, with the International Energy Agency forecasting total U.S. output growth of 320,000 bpd in 2017 to an average of 12.8 million bpd.

America’s oil output has risen more than 500,000 barrels per day since the beginning of October, a clear sign of the positive effect stable $50+ crude prices are having on shale producers. These U.S. firms will be pleased as punch to hear that OPEC is actually making the cuts it outlined two months ago, because to them, those lost barrels represent an opportunity to capture ceded market share in a better price environment.

OPEC’s output reduction is greater than the corresponding increase in American oil output, so over time we can expect supply and demand to start to balance. But en route to that outcome, U.S. producers are going to gain a better toehold in the market, and even if the crude glut disappears, it’s hard to imagine prices will return to the high levels in which they existed for much of the beginning of the 21st century. This is the new oil market reality, and America is playing a major role in forming this new equilibrium.

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