Oil exchange traded products, including 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, posted modest gains even amid some Friday disappointment from the Organization of Petroleum Exporting Countries (OPEC).
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.
“OPEC has now decided they will “wait and see” what happens between now and their March meeting. As U.S. shale oil continues to thrive and seasonal demand wanes, the surplus that has weighed on markets for three years could return. If OPEC doesn’t extend the supply curbs, the market will return to oversupply again, forecasts from the International Energy Agency indicate,” according to Phil’s Stock World.
Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
“Saudi Arabia has a very unfair advantage over their OPEC buddies with a $9 average production cost so it hurts them a lot less to cut production because their margins are so massive for each barrel sold. They wanted to get the other OPEC producers to agree to cuts but many of those countries are having trouble making their budgets,” notes Phil’s Stock World.
Saudia Arabia is the largest OPEC producer and is widely viewed as the kingpin of the cartel. To this point in the third quarter, investors have yanked over $1 billion from USO.
Between 2014 and 2016, global oil companies reduced spending by a whopping 40%, efforts that included significant layoffs and withdrawals from projects seen as too expensive or unlikely to bear near-term profits.
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