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Last Wednesday, OPEC reached an agreement to reduce production for the first time in eight years, and non-OPEC member Russia also joined the ranks of production cuts. International oil prices soared by more than % during the session, and energy stocks rose across the board. While crude oil bulls are riding high, overseas media and analysts calmly point out that the production cut agreement can only stimulate oil prices in the short term. With "opponents" like U.S. shale oil existing, we should not be overly optimistic about the future upward momentum.
Complying with the agreement is crucial
OPEC announced at a press conference held after the meeting that OPEC agreed to reduce daily production by about 10,000 barrels to 10,000 barrels starting next month.
Saudi Arabia, OPEC’s largest oil producer, agreed to significantly reduce production by about 10,000 to 10,000 barrels per day. Iraq, OPEC's second largest oil producer, agreed to cut production by 10,000 barrels per day, bringing daily production to 10,000 barrels per day. Non-OPEC member Russia agreed to cut production by 10,000 barrels per day. OPEC agreed to a small increase in Iran's monthly production levels.
Judging from the statement, Iraq's compromise and Russia's joining make people more optimistic about the conclusion of this agreement, but the final implementation of the agreement is still unpredictable. As McNally, president of the Washington Consulting Company, commented on Twitter, it is crucial to comply with the production reduction agreement. The Russian agreement "must be trusted, but it must also be verified."
Goldman Sachs also pointed out in the report that the participation of non-OPEC oil-producing countries made this production cut higher than the preliminary agreement reached in Algiers, but if oil prices are to rise further, the catalysts needed include: non-OPEC Oil-producing countries have confirmed their participation in production cuts, there is evidence that OPEC members are complying with the production reduction agreement, and given the conflicting figures in the official agreement, further clarity is needed on what Iran has agreed to do. Therefore, this is a short-term production cut targeting excess inventories rather than high oil prices.
Brogan, global head of oil and gas trading at Ernst & Young, believes that OPEC’s decision to establish an independent monitoring committee shows that it is beginning to focus on discipline. This move gives people more confidence that OPEC members will abide by the agreement reached, but only when production cuts are implemented. , will we know the actual impact on the market. Until then, markets are expected to experience only brief jitters as they have in past meetings.
Facing the impact of US shale oil
While OPEC is worried about the implementation of the production reduction agreement by member states and non-member states, it may also be troubled by the impact from US shale oil producers.
In the past two years of low oil prices, the global oil industry has laid off more than 100 workers and many oil service companies in North America have gone bankrupt. But oil tycoon Hamm predicted in 2004 that OPEC would compromise sooner than U.S. shale oil producers. Now, his prediction has come true, with shares of his company Continental Resources soaring 3% on Wednesday.
Bloomberg reports that the boost to oil prices from the production reduction agreement may continue into the first half of the year. At the same time, the accompanying result is that the U.S. shale oil field will increase production, and the first to respond will be the Permian Basin in Texas and New Mexico. As the home of oil gushing wells, the area is rich in resources. It is expected that a drilling platform will be reactivated in the area next year.
Hess Petroleum Company said in a recent conference call that the company has improved production efficiency in the Bakken oil field, reduced costs and increased productivity. Briard, an energy equity analyst at Hawkins Capital Management, said that everyone is increasing the drilling rate and this is not just a Bakken phenomenon. He favors shale oil stocks in Texas' Permian Basin such as Parsley Corp ( ), Ring Energy Corp ( ) and Matador Resources Ltd ( ).
Reports from Reuters believe that the increase in U.S. production may make the oil price response lose its luster. Oil prices may climb further in the near term, but this is expected to be short-lived as the United States may take advantage of higher oil prices to increase production. If oil prices rise above the dollar per barrel, producers will resume well production. In the coming weeks, the oil market may return to the range of volatility seen since the summer.
&At least now, OPEC should understand that they are in a tug-of-war with the United States. & Delan, head of energy strategy at Royal Bank of Canada, said.
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