Regardless of the resurgence of U.S. shale oil, OPEC doesn’t seem to have a lot of options. They tried to defend market share in 2014, and while it did bankrupt some U.S. producers and temporarily halt U.S. production growth, for the most part, it simply caused most producers to become leaner and more efficient.
OPEC has now tried to defend oil prices, and shale producers responded by quickly ramping up production. As I have noted before, they are in a no-win situation. Continuing with the production cuts through at least year-end is probably the best option they have. But should U.S. production continue to rise, it could nullify OPEC’s production cuts by 2018.
It is important to keep in mind that production is but one piece of the picture. Another is a global demand that is once more forecast to rise by 1.3 million BPD this year. So if OPEC maintains the production cuts at ~1.5 million BPD, and U.S. production increases by ~1 million BPD by next year, there would still be a shortfall of nearly 2 million BPD by 2018.
Nevertheless, bearish sentiment in the market over the past month caused many hedge funds and money managers to unwind their bets on higher oil prices. Net-long positions in crude oil fell to the lowest levels of 2017 by early May, and as those positions were unwound the price of West Texas Intermediate (WTI) was driven back into the mid-$40s.
The price has since recovered somewhat, but should OPEC do the unexpected and not extend the cuts then oil will likely drop back in the $30s. That’s unlikely, in my view, but stranger things have happened over the past year.