(Michael McDonald, Breaking Energy) For the past two years oil prices have suffered because of excess supply. To respond to this slump, OPEC, in conjunction with other oil producing countries, came to an agreement that would ensure a reduction in the production of crude oil. As of January 2017, the agreement has gone into effect with strong support from participating countries.
According to the International Energy Agency reported that 90% of the countries in accord with the agreement have maintained support and participation. The price of the OPEC Reference Basket rose from $25 per barrel in 2016, to $52.40 per barrel in 2017 largely thanks to OPEC’s supply cut.
While this increase displays a promising recovery, the participants in this agreement still face an external threat: U.S. Energy Producers. While OPEC and the participating oil producing countries have worked to reduce oil exports, U.S. oil producers have continued to grow their business and production. In a recent report, the Energy Information Administration predicted that U.S. shale oil production will increase by 80,000 barrels per day by March 2017. This information highlights U.S. shale oil production companies as investments with strong growth potentials. A recent article from Seeking Alpha stated that the U.S. is not the only country that oil producing nations should be aware of. Canada and Brazil are expected to further their oil production and increase the global supply of available oil. This expansion of production will continue to threaten the price of oil, and, as a result, threaten the economies of OPEC and oil producing nations.
It is important to note that the price of oil is not the sole concern for the countries participating in the 2016 agreement. A major concern for many nations is their security of the market share. Prior to cutting back production, these nations held a significant percentage of the market share for this industry. Now that the production cuts have been enacted, it will become increasingly difficult to maintain their position. For example, Saudi Arabia previously had one of the largest market shares in the oil industry. Production cuts, in combination with the rising threat of the U.S. oil industry, are posing a serious threat to the country’s position in the market. To combat these threats, Saudi Arabia has targeted Asia as a new market in an effort to keep hold of their position. Although this strategy has not completely mitigated the threat, it may assist in slowing the effects of the production cuts. U.S. shale oil producers have a unique opportunity to secure a greater percentage of the industry’s market share at this point in time.
OPEC’s agreement in accordance with other oil producing countries is a noteworthy achievement highlighting cooperation that is viewed as uncommon for the participating countries. The goal of the agreement is logical, as are the measures that the countries have taken to ensure price increases. The problem lies in the increasing U.S. production of oil. This fairly recent member of the oil industry will continue to be a significant external factor in determining oil prices.
Reprinted with permission from Breaking Energy via iCopyright license.