In November, the Organization of Petroleum Exporting Countries (OPEC) agreed to cut oil production by 1.2 million barrels per day. As a result, oil prices have raised slightly now that the cuts to supply have started to be noticed. But is it enough? In the midst of an oil glut, OPEC’s cuts haven’t truly taken hold just yet. But those cuts are starting to be noticed as oil has risen to over $50 a barrel. However, the U.S. has taken advantage of OPEC’s supply reduction to efficiently produce oil from shale and fracking to offset those OPEC cuts. Now, with the OPEC deal coming up for renewal, will the deal keep going? Can oil continue to rise?
What Does OPEC Renewal Mean for U.S. Oil?
As OPEC works to reduce the global supply of oil by reducing production by member and nonmember countries alike, the U.S. has actually increased its oil production. With a smaller supply come higher prices, which is the exact reason why OPEC agreed to cut production. That deal called for a decrease in production of about 1 million barrels per day. But for the U.S., those higher prices have presented an opportunity to increase jobs and produce more revenue. And while U.S. oil has been slowly but steadily climbing, can the industry continue to see growth or is oil ready to fall again?
According to OPEC’s Secretary-General Mohammed Barkindo, the market is already rebalancing itself, with the glut starting to wind down. “I remain cautiously optimistic that the market is already rebalancing,” he told reporters in Baghdad. Now the question becomes, if OPEC cuts are taking effect, will the deal be renewed?
That question won’t be answered until May 25th, when OPEC meets to discuss the renewal of the plan. But that comes down to oil price. If prices end up skyrocketing north to the $60-70 range, OPEC producers will likely decide they want to take advantage of the price surge and produce as much oil as possible, which would then in turn lower prices right back down. However, if prices fall, the deal would be seen as ineffective, at which point the deal would be scrapped, and producers would go back to pumping out as much oil as possible.
Currently, oil is at a level ($50-55 per barrel) that can be seen as an OPEC win. If prices continue to stay within the current range, and climb just a bit higher from the $50.60 per barrel that oil finished at on Friday, OPEC would most likely extend the program for at least another six months, especially as nonmember countries including Russia continue to cut production, and members continue to work towards 100% compliance.
And that’s great news for the U.S., as the oil industry increases production to offset the dwindling supply of oil. However, that’s a dangerous game. If the U.S. is too effective in offsetting the OPEC reduction, that deal is then seen as ineffective, meaning that the deal wouldn’t be renewed, and OPEC members would start churning out more oil, causing another glut and bringing back familiar problems for U.S. oil.
The U.S. is wise to take advantage of the supply cut, but should also place caps on production to ensure that OPEC creates a longer-term agreement, affording the country the opportunity to continue to increase production over a longer period of time.
Watch as Saudi Energy Minister talk about OPEC cut from CNBC:
So far, five OPEC countries have said they’re on board for extending the agreement, along with a couple nonmember countries. So long as there are no drastic changes in oil price, expect to see the agreement renewed. Combined with completion of the Dakota Access Pipeline and construction of the Keystone XL pipeline, the future is looking friendly for U.S. oil companies.
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