OPEC cuts crude pro­duc­tion, sta­bi­lizes oil prices after slide

San Antonio Express-News - - BUSINESS - By Jor­dan Blum

The Hous­ton en­ergy sec­tor may have dodged an­other oil bust as OPEC, Rus­sia and other pro­duc­ers agreed to cut pro­duc­tion through the first half of 2019, sta­bi­liz­ing crude prices that had fallen sharply over the past sev­eral weeks.

The deal, un­veiled Fri­day in Vi­enna, aims to take about 1.2 mil­lion bar­rels a day of crude from the mar­ket and head off a glut that was de­vel­op­ing as global pro­duc­tion — led by U.S. shale drillers — surged, de­mand weak­ened and stock­piles climbed. In a mat­ter of weeks, prices plunged from more than $76 a bar­rel to just over $50, re­call­ing the events of four years ago, when OPEC, fac­ing sim­i­lar con­di­tions, de­cided to forgo pro­duc­tion cuts and spurred the worst oil bust in a gen­er­a­tion.

Oil prices jumped by about 5 per­cent shortly after the deal was made pub­lic, and set­tled in New York at $52.61, up about 2 per­cent. Mike Bradley, who was in Vi­enna for the Hous­ton en­ergy in­vest­ment bank Tu­dor, Pick­er­ing, Holt & Co., de­scribed the week’s de­vel­op­ments as a roller coaster ride that started op­ti­misti­cally, sunk to gloom when no deal was struck Thurs­day, and re­cov­ered the next day when the agree­ment was reached.

“There was a lot of re­lief,” said Bradley. “It would’ve just been hor­ri­ble for the Hous­ton area, jobs and ser­vices. The play­ing field is at least bal­anced now.”

The nation’s oil and gas sec­tor is still re­cov­er­ing fol­low­ing the oil bust that be­gan in 2014, cost tens of thou­sands of jobs and pushed scores of com­pa­nies into bank­ruptcy. But as prices climbed over the past year, pro­duc­tion has surged to new records, led by the Per­mian Basin in West Texas.

U.S. pro­duc­ers are pump­ing an es­ti­mated 11.7 mil­lion bar­rels day, with out­put in the Per­mian hit­ting 3.7 mil­lion bar­rels a day — about one-third of all U.S. pro­duc­tion. That out­put helped in­crease U.S. crude in­ven­to­ries by mil­lions and fu­eled con­cerns that sup­ply was again out­strip­ping de­mand.

Hit­ting sin­gles

Un­like many other oil­pro­duc­ing na­tions, the United States gov­ern­ment

doesn’t con­trol its oil in­dus­try and can’t or­der com­pa­nies to cut pro­duc­tion. That has left it to OPEC and Rus­sia, which have formed an al­liance called OPEC+, to try to man­age the global oil sup­ply.

The agree­ment reached in Vi­enna in­volves OPEC cut­ting pro­duc­tion by 800,000 bar­rels a day. That’s an av­er­age cut of 2.5 per­cent per OPEC nation, ex­clud­ing the ex­empted coun­tries of Iran, Venezuela and Libya, all of which are deal­ing with di­min­ished out­put from in­ter­nal con­flicts or, in the case of Iran, U.S. sanc­tions.

Saudi Ara­bia will start cut­ting in Jan­uary, tak­ing the bulk of the OPEC re­duc­tions by low­er­ing out­put from 10.7 mil­lion bar­rels a day to 10.2 mil­lion bar­rels, said Saudi en­ergy min­is­ter Khalid Al-Falih. Other OPEC na­tions such as the United Arab Emi­rates and Kuwait are ex­pected to take siz­able cuts as well.

An­other 400,000 bar­rels per day in ad­di­tional cuts would come from Rus­sia and other non-OPEC al­lies scal­ing back pro­duc­tion

by an av­er­age of 2 per­cent. Rus­sian en­ergy min­is­ter Alexan­der No­vak said that’s an even­tual cut­back of about 230,000 bar­rels daily for Rus­sia from its 11.4 mil­lion bar­rel per day out­put in Oc­to­ber.

“This is a very strong sig­nal to any­one who has doubted us,” No­vak said at the fi­nal press con­fer­ence in Vi­enna.

Oil mar­kets hoped OPEC+ could reach agree­ment on big­ger cut­backs, but an­a­lysts said the deal is close to the best, re­al­is­tic out­come. “This wasn’t a home run for OPEC,” said Clay Sei­gle, man­ag­ing di­rec­tor for oil at the en­ergy re­search firm Gen­scape, “but it was at least a base hit.”

Early assess­ment

Most U.S. en­ergy com­pa­nies need oil closer to $60 a bar­rel than $50 to re­main healthy. Any­thing above $60 is a boon for the vast ma­jor­ity of the in­dus­try.

OPEC last failed to act in late 2014 as oil prices were slid­ing from a peak of more than $100 a bar­rel. That in­ac­tion ac­cel­er­ated the fall in prices and helped trig­ger

a pro­longed oil crash, reach­ing bot­tom at $26 a bar­rel in early 2016.

Later that year, Rus­sia and Saudi Ara­bia, now the world’s sec­ond and third largest pro­duc­ers, formed an al­liance and the bur­geon­ing OPEC+ group was formed. They agreed to cut pro­duc­tion, lift­ing prices and end­ing the bust.

With the oil glut drained, OPEC and Rus­sia last sum­mer in­creased out­put, in part to avoid po­ten­tial short­ages as pro­duc­tion in cri­sis-rid­den Venezuela con­tin­ued to fall and U.S. sanc­tions on oil ex­ports from Iran were tak­ing ef­fect. But the in­creases in pro­duc­tion have come faster than ex­pected. And the White House un­ex­pect­edly is­sued waivers from Iran sanc­tions to some of the world’s big­gest en­ergy con­sumers such as China and In­dia, keep­ing more oil on the mar­ket

OPEC said Fri­day it will move up its next meet­ing from June to April so it can as­sess how the deal is pro­gress­ing and de­cide on pos­si­ble ad­just­ments if the waivers ex­pire and Ira­nian ex­ports are with­drawn from the mar­ket.

One con­cern is the Saudi-Rus­sian al­liance has be­gun to over­whelm OPEC to the point that Qatar, an en­emy of Saudi Ara­bia, opted this week to pull out of the car­tel.

Qatar, how­ever, is pri­mar­ily a nat­u­ral gas pro­ducer that doesn't pump much oil, so the ef­fect of global sup­plies should be min­i­mal.

The tweet fac­tor

Pres­i­dent Don­ald Trump, how­ever, is a work­ing against out­put cuts, ar­gu­ing via Twit­ter that lower oil prices mean lower gaso­line prices, which are good for Amer­i­can con­sumers.

The counter ar­gu­ment is low oil prices crip­ple a grow­ing en­ergy sec­tor and cost states like Texas many thou­sands of jobs and the U.S. econ­omy bil­lions of dol­lars that come into the coun­try from in­creas­ing crude ex­ports.

The Saudi en­ergy min­is­ter em­pha­sized that U.S. oil com­pa­nies are breath­ing a sigh of re­lief be­cause of the OPEC+ deal, even if Trump dis­ap­proves. “I think we can con­tinue to co­ex­ist with rea­son­able

growth along with U.S. shale,” Al-Falih said.

He cau­tioned, how­ever, that Saudi Ara­bia isn’t will­ing to cut pro­duc­tion by mil­lions of bar­rels if U.S. pro­duc­tion keeps grow­ing for years on end.

“If we find out we are hav­ing to cut un­rea­son­ably,” he said, “then that’s when we’ll we say we can’t do it any more.”

Joe Kla­mar / AFP/Getty Im­ages

OPEC Pres­i­dent UAE En­ergy Min­is­ter Suhail al-Mazrouei ad­dresses a meet­ing in Vi­enna, where oil prices were dis­cussed.

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