OPEC yesterday agreed to their first production cut in eight years with members on paper at least agreeing to a cut of 1.2million barrels a day. Headlines such as ‘OPEC resurrection’ ‘OPEC are back’ and ‘OPEC in the driving seat’ combined with a near 10% bounce in the price of Brent, welcome the news that OPEC and Russia are working together and Saudi and Iran are in agreement.
With the Standard and Poor’s Energy Sector Index up 5% yesterday and expectations from OPEC that crude will be trading around $60 at year end the celebrations in the industry look to continue for the coming period. However, the agreement depends on self-compliance of all the countries involved to keep to targets and there remains problems as to how to measure production and so this agreement will be extremely difficult to police. Countries such as cash starved Venezuela and Angola would love to take advantage of higher pricing and sceptical traders doubt if Iraq and Iran will be in compliance in just a couple of months time. Also the promised reductions by non-OPEC members Russia and Mexico of 500,000 barrels a day is a huge proportion of the reduction and in the case of Mexico the cut looks more like a natural decline rather than genuine production compliance.
However, in the meantime the champagne flows for oil producing countries led by Saudi, but have they forgotten the target of over supplying the market since late 2014 and the ‘pump at will‘ policy led by Saudi Arabia over the last almost two years?
With the oil price on the up many of the US shale producers, the segment of the industry the OPEC policy was designed to kill off could be back in business. Continental Resources Inc. the Oklahoma based oil and natural gas exploration and Production Company bounced 25% yesterday on the OPEC agreement the biggest gain since 2008, an indication of the expectations for US producers.
Ironic really while OPEC celebrates it could be the US shale industry having a party.