OPEC agrees to production cuts

Source: Nathanial Gronewold, E&E reporter • Posted: Thursday, September 29, 2016

HOUSTON — The Organization of the Petroleum Exporting Countries will cut production in an effort to boost prices and shore up members’ economies. The news sent crude oil prices sharply upward.

The agreed-to cuts, reported by The Wall Street Journal and other outlets, don’t amount to much of total OPEC output. They total roughly 740,000 barrels a day from current estimated output volumes of over 33 million barrels per day. Rising global offshore production will likely match that volume in a little over a year.

But traders on the commodities exchanges didn’t care, judging by the sharp upward movement in oil prices as a reaction to the news.

International Brent crude contracts for November delivery soared by more than 5 percent, closing in at $49 per barrel at press time. U.S. domestic West Texas Intermediate (WTI) were flying higher to the $48-per-barrel range.

By comparison, the OPEC crude basket price stood at around $42.30 yesterday. WTI crude prices had been struggling for some time to break free from the sub-$45-per-barrel range.

OPEC’s Twitter feed confirmed the agreement, reached this afternoon at a special meeting of the exporters cartel held in Algiers, Algeria. OPEC’s next official meeting is scheduled to take place in Vienna in November.

Crude at $45 per barrel has encouraged a rebound in drilling in West Texas and parts of Oklahoma. There is little indication of new robust drilling activity in other prominent shale oil fields, including the Bakken and Eagle Ford shales. That may change on this news.

In a new report posted today, Platts RigData, a forecasting unit of S&P Global Platts, said its analysts see the U.S. land rig count rising steadily, from an average of around 450 active rigs in 2016 to approximately 676 rigs active on average in 2018. That 2018 forecast activity rate is still far below the peak rig count of 2014 at the height of the shale oil boom, when nearly 1,800 land rigs were deployed to the oil patch.

OPEC, at its current production levels, is already violating its usual cap of 30 million barrels a day of crude oil production. Prior agreed-to cuts or even a purported “freeze” in output were difficult for OPEC members to arrange as Iran, Iraq and Libya attempted to actually increase oil production, placing pressure on Saudi Arabia to cut back the most.

Nigeria’s oil output is down due to violence, and Venezuela’s oil production has declined because of underinvestment and the economic crisis there.