OPEC ‘Truce’ May Jump-Start U.S. Fracking

  • Date: 30/09/16
  • Patti Domm, CNBC

OPEC’s promised production deal will probably prop up oil prices, but it may also jump-start more U.S. shale drilling — which would go against the very reason the cartel started a price war in the first place.


Analysts at both Bank of America Merrill Lynch and Citigroup pointed to the possibility that OPEC’s move toward a production cut would drive up oil prices, and that might encourage more drilling by the shale industry, which has finally seen rig counts pick up and production levels stabilize after a steep decline.

BofA anlysts said Thursday that flow rates in the Permian basin of Texas and New Mexico have improved in recent months, meaning U.S. shale players are getting more oil out of the ground with better technology.

“Worryingly for the cartel, production in the West Texas region has already started to increase sequentially. Stated differently, OPEC has declared a truce on oil prices. But relentless improvements in shale technology will keep Saudis awake at night wondering if they have made the right choice,” the analysts wrote.

“The $45 level was starting to bring them back. They’re driving down costs all the way through the production chain,” said John Kilduff of Again Capital. But shale drillers could also add more supply to the already oversupplied market, and that would cap gains in oil.

Some industry experts believe more drillers could put rigs back in operation at $50, but in order to see a real resurgence, oil needs to be at $60 per barrel.

Oil prices were up over 1 percent Thursday, a day after surging more than 5 percent the promise of an OPEC production agreement. West Texas Intermediate was trading near $48 per barrel. Prices will likely stay range-bound, Citigroup analyst say.

“This is not a return to the old OPEC given a new world with shale and lower demand growth. Sustained higher oil prices all else equal could see US production increase again, and hence limit the oil price move. Put differently, absent a demand driven move, we still think a rather range-bound oil market is in store for us more medium term,” wrote the Citigroup analysts.

OPEC has so far only reached a preliminary agreement to strike a deal to cut production by 200,000 to 700,000 barrels a day, from 33.2 million barrels. The breakdown of which countries will trim output is expected to be worked out by its November meeting. But BofA points out that Saudi Arabia normally cuts back at this time of year. the Saudis produced about 10.6 million barrels a day last month.

“After all, Saudi has cut production seasonally by 320,000 (barrels per day) every year between July and January. The move in Algiers may reflect the impending fiscal pressures, as many OPEC government budgets are starved for cash. Also, it is critical to remember that pegged currency regimes across many oil producers have put a huge strain on foreign exchange reserves in key OPEC members,” the BofA analysts wrote.

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