OPEC’s stumble is boon to shale

Market reaction shows influence U.S. producers have on industry

Twenty-four countries renewed a fragile pact to curb the world’s oil glut Thursday, but traders sighed and sent oil prices hurtling below $50 a barrel again.

At a long-anticipated summit in Vienna, a coalition of OPEC nations and other major producers agreed to keep 1.8 million barrels of oil off the market every day for another nine months, a bid to drain bloated storage tanks around the world. It’s a follow-up to the group’s failed attempt in the first half of the year to get rid of excess oil, push crude prices significantly higher and replenish depleted government coffers.

But the market reaction was another sign of OPEC’s waning influence over global oil supplies as U.S. shale drillers expand their role as the world’s swing producer. In the wake of the oil bust, American oil companies have found ways to cut costs, improve efficiency and make profits at lower

crude prices, offsetting much of the OPEC production cuts.

U.S. oil prices plunged nearly 5 percent Thursday, settling at $48.90 a barrel after climbing above $51 a barrel in anticipation of deeper cuts by the 14-member Organization of the Petroleum Exporting Countries and 10 other large oil-producing nations, which control three in five oil barrels produced around the world. The sharp drop in oil prices Thursday underscored oil investors’ growing skepticism of OPEC’s ability to manipulate the volatile oil market against the backdrop of a resurgent U.S. shale oil industry.

“Every oil trader in the world is now saying ‘show me,’ ” said Michael Wittner, an oil market analyst at Société Générale, a French bank.

Battle for market share

The industry has struggledfor almost three years to drain a worldwide glut of oil that has caused oil prices to crater from more than $100 a barrel in 2014 to as low as $26 a barrel in 2016 and that cost Texas one in three oil-industry jobs. Supplies have shrunk modestly, but far from enough to propel prices significantly higher.

OPEC, shale drillers and other producers have been locked in a battle for market share, and OPEC’s cuts could open the door for the U.S. oil industry — expected to hit record production next year — to grab a larger piece of the global market.

“OPEC has just cleared the deck for U.S. shale producers,” said Jim Krane, fellow for energy studies at Rice University’s Baker Institute for Public Policy. “U.S. shale producers are going to be saying thank you by increasing supply. The question is whether OPEC and shale will be able to coexist or is shale going to steal all the gains from OPEC’s maneuver?”

For days, speculators had bid up crude prices as oil ministers from the Persian Gulf floated the idea that OPEC and its counterparts might slash output even deeper than its current cuts do. Rumors swirled that Saudi Arabia, which would lose market share by cutting production, would lean hard on the other producers to further cut output, with the resulting higher prices boosting both its initial public offering of a portion of Saudi Aramco, the world’s biggest oil company, and government coffers.

Saudi Arabia needs oil prices to hover above $80 a barrel to balance its budget.

Traders balked when the grander bargain didn’t materialize. Instead, OPEC and the other countries extended the same deal they struck in December 2016, which was the first time the group had successfully formed a coalition since Saudi Arabia pushed OPEC to abandon its role as a market manager in November 2014.

Instead of quickly fixing the oversupplied oil market, OPEC’s pact, analysts said, could give Houston’s slate of oil companies cover for a second shale bonanza in West Texas, Oklahoma and elsewhere that could flood the market with oil again in 2018.

Rig numbers rise

As of last week, the number of oil and gas drilling rigs operating across the United States has vaulted above 900, up from a record low of 404 last May. For each rig, oil companies hire back about two dozen workers and spend millions on services and equipment made in Houston.

Wood Mackenzie, an energy research firm, believes even with OPEC’s cuts, global oil production will increase by 200,000 barrels a day this year because of rising output in the United States, Canada and Brazil.

Next year, oil production growth in the United States alone could top 950,000 barrels a day, as drillers hire workers and spend more money on oil field services in Houston. That projected figure is nearly 20 percent higher after OPEC’s agreement for a nine-month extension Thursday.

The Energy Department has projected U.S. oil production could climb beyond 10 million barrels a day by the end of next year, eclipsing its record set in 1970.

Still, the International Energy Agency, a Parisbased group advising oil-importing countries, and other analysts believe OPEC’s cuts will reduce global oil inventories sharply in the second half of the year, as higher seasonal appetite for oil and gasoline kicks in across the globe.

“We’re heading into peak oil demand season,” Wittner said.

On Thursday, Saudi Arabia’s energy minister, Khalid Al-Falih, said he expects oil inventories to drop below the five-year average before the end of 2017.

In the first half of this year, analysts said, OPEC’s cuts didn’t work because the cartel had ramped up output just before the end of last year, keeping storage tanks well supplied in the first half of the year.

Eventually, analysts said, declines in oil storage will send prices back up — all the better for shale drillers who will continue pumping at $50 a barrel oil.