OPEC has an impossible job when it comes to stabilizing oil prices

Business Insider | 11/28/2017 | Nick Cunningham, OilPrice.com
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OPEC will likely extend production cuts for another nine months to help inflate oil prices.

However, US crude oil production is booming, threatening to offset any supply cuts from the organization.

OPEC - Verge - Production - Cuts - Months

OPEC is on the verge of extending its production cuts for an additional nine months, pushing the deal through the end of 2018. But the determination to keep the cuts in place comes at the same time that U.S. shale seems to be accelerating in response to higher oil prices.

It’s an impossible tension that OPEC has to deal with. Hesitate on cuts and risk another slide in oil prices, or keep the cuts in place and offer more room to U.S. shale?

OPEC - Signal - Oil - Market - Group

OPEC has tried to send a signal to the oil market that the group is operating with a consensus, and it telegraphed its intentions ahead of time to inspire confidence in the group’s cohesion. By demonstrating such resolve, the logic seems to be, the oil market would continue to tighten and prices would remain stable.

But the downside of such a strategy is that it isn’t just oil traders who are confident in a more balanced oil market – U.S. shale has kicked drilling into a higher gear recently, and appears poised to continue to ratchet up production. The rig count has climbed for several consecutive weeks, and U.S. oil production is on the brink of hitting an all-time record high.

Plenty - Signs - Shale - Industry - Troubles

There are plenty of signs to suggest that the shale industry is indeed facing unexpected troubles. But the problem for OPEC is that it simply can’t forecast with any accuracy what to expect from shale drillers over the next year.

Nevertheless, the objective of the OPEC production limits is to drain global crude inventories back down to average levels, a goal that will take more time to reach. With that in mind,...
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