OPEC deal could lead to US shale surge

Kuwait Times - - BUSINESS -

With this week’s deal to cut out­put, OPEC is cre­at­ing in­cen­tives for Amer­i­can shale pro­duc­ers to boost out­put just as the in­com­ing Trump ad­min­is­tra­tion vows mea­sures to pro­mote US oil devel­op­ment. The deal, an­nounced Wed­nes­day by the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries, will cut the car­tel’s out­put by 1.2 mil­lion bar­rels per day (bpd).

Oil prices shot up on the an­nounce­ment, which was more mus­cu­lar than many an­a­lysts ex­pected, boost­ing prices by nearly 10 per­cent Wed­nes­day and lift­ing the US bench­mark con­tract to above than $50 a bar­rel Thurs­day. OPEC’s planned pro­duc­tion cuts are nearly the same amount US pro­duc­ers trimmed in the wake of a two-year skid in prices.

US out­put has fallen to 8.5 mil­lion a day, down from a peak of 9.6 mil­lion bar­rels a day in April 2015 fol­low­ing cut­backs in West Texas and other key shale-pro­duc­ing re­gions. Some be­lieve the OPEC deal to boost prices could sow the seeds of its un­do­ing as more US com­pa­nies boost out­put in re­sponse, which in turn would push prices lower. US “pro­duc­tion could sur­prise to the up­side,” Mor­gan Stan­ley said in a note Thurs­day. “Sur­pris­ingly, when asked about this pos­si­bil­ity dur­ing the press con­fer­ence it ap­peared the oil min­is­ters were un­con­cerned.”

Mor­gan Stan­ley pre­dicted it would take six to nine months for the price in­crease to prompt a sup­ply re­sponse in the US, around the same time OPEC pro­duc­ers also are ex­pected to ramp up.

‘Amer­ica First’ and en­ergy

The OPEC meet­ing this week also came amid a sea change in US pol­i­tics as the world’s big­gest econ­omy tran­si­tions to Pres­i­dent-elect Don­ald Trump, who vowed in the cam­paign to free the petroleum in­dus­try from bur­den­some re­stric­tions. Dur­ing the cam­paign, Trump promised to open new US lands to petroleum pro­duc­tion, ap­prove new pipe­lines, en­cour­age off­shore devel­op­ment and cut reg­u­la­tions on the in­dus­try. That cock­tail of do­mes­tic poli­cies “could de­press oil prices markedly given Trump’s prom­ise,” Ox­ford Eco­nom­ics said in a re­search note. Harold Hamm, the chief ex­ec­u­tive of shale pro­ducer Con­ti­nen­tal Re­sources who ad­vised Trump on en­ergy dur­ing the cam­paign, ac­knowl­edged the pos­si­bil­ity the OPEC deal could pose prob­lems for US pro­duc­ers if they re­store too much pro­duc­tion.

“We have the abil­ity to over­sup­ply the mar­ket,” Hamm told CNBC on Thurs­day.

The key is not to.” Hamm said limited US re­fin­ing ca­pac­ity has pinched the in­dus­try, in part be­cause for­eign oil com­pa­nies from Saudi Ara­bia and Venezuela own re­finer­ies in the US and are bi­ased to­wards im­ported crude. But it is not clear if Trump will take on for­eign own­er­ship of re­finer­ies.

Trump’s full in­ten­tions on en­vi­ron­men­tal poli­cies also re­main un­clear. The pres­i­dent-elect de­scribed cli­mate change as a hoax dur­ing the cam­paign, but sug­gested in a re­cent in­ter­view with the New York Times that he was open to cli­mate mit­i­ga­tion poli­cies.

Carl Larry of con­sul­tancy Frost & Sul­li­van pre­dicted US shale pro­duc­ers would be pru­dent. “We’ll see an in­crease at a slower pace,” he told AFP. “I think pro­duc­ers will be very, very care­ful not to go too far too fast.”

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