OPEC Agreement Continues to Push Oil Prices Higher

Crude oil prices have climbed above $52 a barrel for benchmark West Texas Intermediate (WTI) and above $55 a barrel for Brent as the OPEC agreement to cut production appears, at the very least, to raise the floor for crude prices from the $30 range to $40. And while the price rise is positive for producers, the limiting factor may be the size of global physical stockpiles.

Add to that the encouragement rising prices have on U.S. producers and the historical difficulty OPEC has had enforcing quotas, and there are sufficient reasons to rein in the current enthusiasm for crude.

For now, though, the crude market appears to be convinced that the OPEC cuts will stick, mostly because it is in the cartel’s best interests to make it stick. Russia’s apparent willingness to curb, if not actually cut, production is also an encouraging sign for producers.

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Production in the Permian Basin is likely to remain about where it is, offsetting production declines elsewhere in U.S. onshore shale regions. If the WTI price should rise to $55 and remain at that level for substantial period — say, six months — production in other shale regions is likely to increase.

Analysts at research firm Wood Mackenzie have said that if prices rise above $55 a barrel for a sustained period, drilling would increase and U.S. onshore production could rise by as much as 900,000 barrels a day by the end of 2018.

In the shorter term, Platts cited analyst Matt Marietta at Stephens who warned that even a supply cut of a million barrels day would not drain OECD stockpiles for at least 18 months. He said told Platts:”Even though the price action is positive, the physical market just can’t absorb much production growth as it exists today until you begin drawing down the inventories.”

If the price remains at around $50 a barrel, Marietta believes declines in the Bakken and Eagle Ford plays would begin to moderate and output from U.S. shale fields could rise by up to 500,000 barrels a day by the end of 2017.

In the near term, OPEC’s cuts are aimed at reducing oversupply, not draining stockpiles. That will take longer, and in order for that to happen, demand will need to remain pretty much where it is now. A stuttering global economy may not be a strong enough engine to maintain that level of demand.

WTI for January delivery traded up about 0.5% Monday morning to $51.93, after hitting a peak of $52.42 earlier. Brent crude for February delivery traded up about 0.5% as well to $54.71, after reaching a peak of $55.33 earlier.

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