The Organization of the Petroleum Exporting Countries (OPEC) has agreed to cut crude oil production, and, though there are few details, it’s likely to good news for U.S. oil drillers.
OPEC’s decision to reduce oil output by 1.2 million barrels per day has already sent London’s Brent benchmark crude price up 8 percent to more than $50 per barrel. The U.S. benchmark price rose 6 percent to $47.97 on Wednesday.
That’s good news for U.S. oil drillers who have been struggling to produce with prices under $50 a barrel. U.S. hydraulic fracturing, or fracking, operations can quickly respond to oil price changes, meaning lots of idle oil wells could come online in the coming weeks if prices keep rising.
Indeed, International Energy Agency (IEA) chief Fatih Birol said U.S. shale oil would “pour” onto markets if OPEC somehow managed to raise prices.
U.S. fracking added millions of barrels of oil per day over-supply of oil in world markets, triggering a price crash in the summer of 2014 when prices were above $100 a barrel. Saudi Arabia, OPEC’s largest producer, added to the price decline by opting not to cut oil production further to buoy prices.
Saudi Arabia was gambling that new shale technology couldn’t compete with low prices, thus increase the market share for cheaper Saudi oil. That’s didn’t exactly happen.
Shale production declined, but only by 12 percent from its 2015 peak. On top of that, shale drillers got way more efficient at taking oil out of the ground. Economist Mark Mills recently noted “[a]verage productivity – the amount of oil produced per rig — was up 20% last year alone while drilling costs stayed flat or declined slightly.”
Oil companies were forced to fire thousands of workers and idle drilling rigs, but some of those losses could be reversed if OPEC sticks to its promise to cut production.
On the flip side, Saudi Arabia and other OPEC member states lost hundreds of billions of dollars in export revenues. The Kingdom itself saw revenues fall from $753 billion in 2014 to $404 million in 2015. They’re expected to lose more money this year.
Even though Saudi Arabia can pull oil out of the ground for about $1 per barrel, it needs oil prices to be relatively high to fund its vast social welfare state.
With U.S. oil companies approaching Saudi levels of production, other OPEC member states were able to get them to agree to a production cut deal.
“Put another way; the Saudis have seen that the amount of money needed to add more American supply keeps shrinking and is moving monthly closer to the Middle East’s vaunted low-cost advantage,” Mills wrote. “At the current tech-driven growth rate, output per rig will double every 3.5 years. That kind of progress is normally seen in Silicon Valley. For consumers it’s exciting, but not so much for shale’s competitors.”
Analysts still predicted U.S. oil output would grow even if OPEC didn’t agree to production cuts.
Goldman Sachs predicted in July that U.S. output would continue to decline through 2016, but would grow slightly in the following years.
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