The price fluctuations of 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 exchange traded products are often tied to the Organization of Petroleum Exporting Countries (OPEC).
However, some oil market observers believe OPEC’s influence is waning. While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
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. Saudi Arabia is OPEC’s largest producer.
“In a research note, Goldman Sachs has effectively demoted OPEC from a price setter to a mere inventory manager, with the cartel’s long-term control over international oil prices diminishing thanks to shale, which sports much faster returns: 6-9 months from final investment decision to peak production versus several years for conventional oil,” 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.
“Several OPEC members have already expressed their readiness to take part in an extension of the cut or have at least acknowledged the need for such an extension. Even Saudi Arabia, OPEC’s largest producer, has softened its stance from being previously unwilling to further strengthen U.S. shale by extending the deal, to saying it would back an extension if inventories remain high,” according to OilPrice.com.
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