Wednesday 14, June 2017 by William Mullally

Focus shifts to shale producers

Mihir Kapadia, Founder and CEO, Sun Global Investments

Crude oil prices were slightly higher after Nigeria reported a pipeline leak. Overall sentiment remained downbeat however as the market has little confidence that production cuts by OPEC and Russia are helping to drain excess supply. July WTI was 0.4 per cent higher at $46.28 per barrel.

The decision by OPEC to extend oil production cutbacks until March 2018 was one of the most significant announcements this year, which is a remarkable indication of the serious commitment OPEC is undertaking in order to steady the rocking oil prices boat. Last year, there were considerable doubts as to whether a cutback deal was in fact even possible; and now OPEC has renewed it for another nine months! The credit must go to Saudi Arabia and Russia for their strong leadership in ensuring the rest of OPEC adopted the proposal they first jointly made over three weeks ago.

The renewal comes at a time when the global supply overhang has been depressing the oil prices and revenues for over the past three years. Although the initial announcement of the cutback extension did boost oil prices as markets would have preferred an actual cut in production rather than an extension under the current levels, we expect the resolve and agreement demonstrated by OPEC to boost prices in the long term, picking up from current levels.

The focus now shifts to how US crude and shale producers respond to higher prices. This sector has been one of the biggest headaches for OPEC as they has been flexible in increasing output in response to higher prices. Thus OPEC’s desire for higher prices over the medium term have been continually thwarted. While the news on the cutback extension may boost oil prices in the short term, however it is unlikely to go above $55 in the medium term as flexible Shale producers have become the main determinant of the marginal prices of oil.

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