Oil slips as OPEC deal seen leading to potential shale surge

Gas transport pipes and processing infrastructure stands at a refinery operated by DK Ukrgazvydobuvannya (UGV), a unit of NAK Naftogaz Ukrainy, in Poltava, Ukraine, on Friday, July 21, 2017. (Bloomberg/Vincent Mundy)

Oil retreated the most in more than two weeks amid worries that OPEC’s deal to extend production cutbacks may take US shale activity to a whole new level.

Futures closed 1.5 percent lower in New York. OPEC and partners including Russia last week agreed to keep cutting output through the end of next year. At the same time, North American explorers probably will boost spending by 20 percent in 2018, according to an Evercore ISI survey of industry budget trends.

“It’s been a steady climb on the production side here in the US, which continues to eat away at OPEC’s hopes for balancing this market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone. “They are sowing the seeds for the deal unraveling just because the way it’s promoting shale output.”

The slide comes after oil jumped about a fifth from early September as investors geared up for last week’s decision by the Organization of Petroleum Exporting Countries and its allies. The producers will maintain cuts until global supply meets demand, Saudi Arabia’s Energy Minister Khalid Al-Falih said. OPEC’s output in November dropped to a six-month low, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.

Shale Surge

But the danger is US shale activity may surge, undermining the OPEC reductions. The US oil rig count was already at the highest level since September last week, according to Baker Hughes data released Friday, and US output was at a record high in the latest weekly government statistics.

West Texas Intermediate for January delivery fell 89 cents to settle at 57.47 dollars a barrel on the New York Mercantile Exchange. Total volume traded was about 32 percent below the 100-day average.

Brent for February settlement slid 1.28 dollars to end the session at 62.45 dollars on the London-based ICE Futures Europe exchange, the lowest level in two weeks. The global benchmark crude was at a premium of 4.96 dollars to February WTI.

Pioneer Natural Resources Co., one of the biggest US independent drillers, is planning to raise output to more than 1 million barrels of oil equivalent a day by 2026 from about 300,000 a day this quarter, Chief Financial Officer Richard Dealy reiterated last week at a conference in Singapore.

Citigroup Inc. forecasts that the market will be balanced in 2018 but is bearish for 2019, with a Brent forecast of 49 dollars a barrel as supplies return from OPEC and increase from Brazil and Russia.

A rising dollar also pushed prices lower Monday. The Bloomberg Dollar Spot Index, a gauge of the dollar against 10 major peers, increased as much as 0.5 percent. A stronger greenback typically reduces investors’ interest in commodities.

“Oil is really suffering at the moment from having a strong run and momentum trades are getting negatively impacted,” Atul Lele, chief investment officer at Nassau, Bahamas-based Deltec International Group, said by telephone. The “slowing US dollar liquidity environment” is also depressing oil prices, he said. – Bloomberg

Recommended stories: