In an earlier article – Why OPEC’s Announced Cuts Are A Really Big Deal – I addressed some of the skepticism around the recent production cuts enacted by OPEC. Today I want to consider in more depth the notion that U.S. oil producers might swiftly negate the impact of these production cuts.
To review, in November OPEC announced that it would enact 1.2 million barrels per day (bpd) of production cuts on January 1st. OPEC also announced that certain major non-OPEC members – most notably Russia – would cooperate with the production cuts, pushing the total amount of targeted cuts to 1.8 million bpd.
Some analysts cite two factors that could render OPEC’s cuts ineffective. The first is simply that OPEC members will cheat, as they have historically done. Certainly some members may overproduce their quotas, but OPEC is going to monitor global crude inventories. Those inventories had already begun to come down from record highs prior to the OPEC announcement, partly in response to declining U.S. shale oil production.
Further, a new Reuters survey has determined that OPEC’s compliance with the cuts in January was 82%. Tanker-tracker Petro-Logistics has estimated that crude oil shipments from OPEC countries were down by 900,000 bpd in January. So, early indications are that even if some cheating does occur, substantial cuts have taken place.
But the second factor cited by skeptics is beyond OPEC’s control, and that is that U.S. shale oil producers will simply ramp up production as oil prices rise, negating the OPEC cuts. That’s a reasonable concern, so let’s delve a bit deeper.
At the height of the shale boom, U.S. producers were adding more than a million bpd of oil production each year. At that growth rate, the production cuts could indeed be offset in a couple of years. But a look at the relationship between the number of oil rigs drilling for oil and oil production at first glance implies that a rapid turnaround is unlikely:
