After spending most of 2016 talking about cutting production, OPEC—along with a collection of 11 non-member petrostates—finally managed to cobble together an agreement to help reduce the global glut of crude last November. Those cuts started in January, and thus far they’ve been marginally successful, having pushed oil prices up about $10 to $55 per barrel. That’s welcome news for the petrostates responsible for reducing global supplies, but a rising tide lifts all boats, and these higher prices have been especially helpful for cash-strapped American shale companies. As the FT reports, the Saudi energy minister just admitted as much at the CERAweek energy conference in Houston, Texas:
[Saudi Arabia’s energy minister Khalid al-Falih] said the cuts were taking effect more slowly than he expected and added the agreement was helping sow “green shoots” in the industry, mainly in the US. As oil prices have increased, US producers have deployed more drilling rigs, threatening a rebound in supplies unbound by the output pact.
He acknowledged that Saudi Arabia had a hand in “watering of the green shoots,” and welcomed the return of investment in US shale. […]
The comments of Khalid al-Falih at the CERAWeek by IHS Markit conference stood in stark contrast to those of his predecessor at the same venue a year ago. Then, minister Ali al-Naimi bluntly warned shale producers they must trim their costs or risk bankruptcy.
In one simple statement, a top Saudi official is confirming two uncomfortable truths for petrostates in 2017: first, that these cuts have had something of a sluggish and lackluster effect; and second, that American shale producers are direct beneficiaries of this market intervention.
OPEC and its ilk may be heading towards something of a worst-case scenario with these cuts. There’s still enough oil sloshing around out there to prevent crude prices from climbing back above $100 per barrel anytime soon, barring some major supply disruption or world event. Much of the oil these petrostates are taking out of the market is being offset by an increase in American output. That phenomenon is already visible, as the U.S. is once again producing more than 9 million barrels per day (bpd) for the first time in nearly a year. Thanks in large part to rising crude prices, American production has climbed more than 500,000 bpd since October.
This is the Catch-22 petrostates now face: if they cut production, they cede valuable market share to their American rivals, and, to borrow the words of the Saudi minister, the more they cut, the more they “water the green shoots” of the U.S. shale boom.