OPEC Ponders How to Co-exist With US Shale Oil

On Thursday, Opec and non-Opec producers agreed to extend cuts by the same 1.8 million bpd.

Following the decision to extend the current production cuts by a further 9 months, oil prices remained under pressure after the European close.

Oil prices edged up on Friday after tumbling in the previous session when the Organization of the Petroleum Exporting Countries (OPEC) and the other main producers agreed to extend output cuts.

"The market seems to have lost faith in OPEC's ability to do whatever is necessary to reduce the massive oversupply and to bring inventories back to the five-year average" by the first quarter of next year, said Thina Margrethe Saltvedt, analyst at Nordea Bank AB.

Ann-Louise Hittle, vice president at energy consultancy Wood Mackenzie said the "decision in Vienna sends a signal of continued support for oil prices from OPEC which helps USA onshore drillers make plans" to further raise their production.

Mark Papa, chief executive of Permian oil producer Centennial Resource Development Inc, was asked by OPEC delegates to give a presentation on shale's potential last week. That, in turn, is increasing supply and keeping a lid on price gains.

Less oil on the market normally means higher value per barrel.

He further stated that "Equatorial Guinea will always remember with gratitude and affection how Nigeria offered us support on our OPEC application and extraordinary assistance along with our African Brothers".

In the Permian Basin - the largest USA oilfield - Parsley Energy Inc, Diamondback Energy Inc and others are pumping at the fastest rate in years, taking advantage of new technology, low costs and steady oil prices to reap profits at OPEC's expense.

"It is a disappointment that OPEC hasn't done more to balance the markets", Olivier Jakob, energy markets analyst at Petromatrix, told CNBC. The attacks have hit oil production and damaged pipelines in Nigeria.

The extension, which also includes Russian Federation and other non-OPEC countries, was widely expected and had already been factored into oil prices.

But oil traders are hard to please.

"This is half of the roughly 1,800 million barrels per day taken off the market by the OPEC-led cuts", said the analysis. The extension of the accord, which was to expire in June, would effectively lower OPEC's production by 1.8 million barrels per day.

The new agreement is until March 31, 2018; with OPEC's next ordinary meeting set for November 30.

By shifting the focus of Saudi export reductions toward the US - where customs data allow near real-time monitoring of shipments - and away from less transparent markets in Asia and Europe, Al-Falih was putting his personal credibility on the line. The US Congress created it in 1975 after the Arab oil embargo.

A release of half the United States strategic oil reserve over 10 years equals about 95,000 barrels per day, or 1% of current U.S. output.

OPEC had previously cut production levels late a year ago as part of a concerted bid to force prices higher.

  • Zachary Reyes