A coalition of major oil-producing nations on Thursday is expected to extend a pact to keep some crude off the market to support oil prices and curb a worldwide glut created three years ago by U.S. drillers.
At a closely watched gathering in Vienna, the Organization of Petroleum Exporting Countries will consider a nine-month extension for a deal with Russia and other nations to trim output by 1.8 million barrels a day through the end of next year.
So far the effort appears on track, analysts say, but even if all goes to plan, OPEC still faces a dilemma: its rivals in West Texas and Oklahoma may still impede the group’s efforts and stall the long-anticipated rebalancing of the oil market again if prices rise high enough to tempt U.S. shale producers to abandon their recently adopted mantra of financial discipline.
Even though several major U.S. oil companies have promised investors they plan to throttle back operational growth and focus more on returning profits to shareholders next year – with some going so far as to make financial discipline part of executive compensation – high oil prices have historically led to land rushes and drilling surges by companies guided not by national fiat, but profits.
This time last year, when OPEC and its partners first announced an agreement to curb supplies, crude prices soared, U.S. oil companies dispatched hundreds of drilling rigs and economic activity surged in Houston for months. But market and industry enthusiasm waned in mid-2017 amid fears a second shale boom would offset OPEC’s output reductions and undercut prices.
The latest wrinkle is that U.S. oil companies have said they will only drill as long as they can make returns on the crude they pump. Whether they do could determine if Houston’s recovery gains momentum or stalls.
“It’s hard to believe they can keep their fingers off the levers,” said Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston. “Someone is going to be tempted, and as soon as one goes for it, they’re all going to.”
OPEC’s production-cut agreement, reached last fall between two dozen countries and renewed over the summer to run through March, has cut deep into bulging crude stockpiles around the world, reducing inventory levels from 338 million barrels above historical norms in January to 138 million barrels in September.
But in the United States, at $54 a barrel oil, crude production growth in 2018 could double this year’s gains, growing at an annual average of 700,000 barrels a day, compared with 365,000 barrels a day this year, said Mike Wittner, an oil-market analyst at French bank Société Générale. In the first half of next year, the bank believes global oil inventories could rise by 300,000 barrels a day.
U.S. oil prices slid 22 cents in early trading on Tuesday to $57.89 a barrel amid market jitters over whether Russia will play ball with OPEC. But if a deal goes through, as analysts expect, higher crude prices could provide financial cover for U.S. oil companies to drill more.
“For most of these guys, $60 oil means they have cash flow for the first time in many years, after cutting and cutting, when most were planning for oil prices around $50,” said R.T. Dukes, an analyst at energy research firm Wood Mackenzie. “Does extra cash flow mean they’re going to blow out their balance sheets again? Some will. Growth rates will probably grow higher, but I’m not sure they’ll spend at all costs.”
