The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, and other oil-related exchange traded products remain beholden to the Organization of Petroleum Exporting Countries (OPEC).
Of course, that includes Saudi Arabia, OPEC’s largest producer. After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply. The reductions took effect January 1, and the oil producers will reconvene after six months to evaluate the results of the deal.
In a reversal of previous sentiments, Saudi Arabia accepted Iran’s higher output target as a special case. Previous OPEC talks broke down after Iran, which suffered from curtailed exports under strict global sanctions, argued for increasing its output to pre-sanction levels. However, there are some potential problem children within the cartel that could undermine the output reduction effort
Saudi Arabia is eyeing oil at $60 barrel this year, a comfortable price for many OPEC members, but probably not high enough to encourage U.S. shale producers to significantly increase their rig counts. Getting there is another matter.
“This belief is questionable, however, since U.S. producers have been raising oil production ever since OPEC struck a deal to curb production in a bid to improve prices. In fact, according to most analysts, it is precisely this increase in U.S. crude output that has been acting as counter-pressure against hopes of a reduction in the global oil glut, keeping the oil price rise within tight limits,” reports OilPrice.com.
Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices. Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
“In the week to February 17, output in the shale patch exceeded 9 million bpd for the first time since last April, official data showed, supporting forecasts that shale boomers are determined to continue its growth, investing in new developments and continuing to work on reducing costs,” notes OilPrice.
For more information on the crude oil market, visit our oil category.