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OPEC Doubles Down on its Losing Hand

The American Interest

The oil cartel OPEC and a collection of ten other petrostates recommitted themselves to a plan to cut production this week.

The FT reports:

The agreement hammered out in Vienna on Thursday will see the 1.8m barrel a day cuts, first agreed in November, extended to the end of the first quarter of 2018. Russia and other non-Opec countries have signed up to the deal, Suhail al Mazrouei, the oil minister for the United Arab Emirates, told the Financial Times. “Everyone is in agreement,” he said.

These petrostates decided on a production cut last November that would last through the first six months of 2017, and this new extension, agreed upon in Vienna during OPEC’s semiannual meeting, will require those limits on output to continue another nine months, through March of next year.

But if the goal of this market intervention was to reduce an oversupply and set off a price rebound, why has Brent crude fallen nearly 5 percent in trading since the announcement? The WSJ has an idea:

A longer period of the same level of production disappointed investors in part because of the widely held expectation that U.S. shale will continue to ramp up, keeping supply high and dampening prices. […]

That means U.S. shale may emerge as the deal’s biggest beneficiary, a reality that highlights the pressure on the two massive players, Saudi Arabia and Russia, to extend their output agreement—even though so far it hasn’t significantly lifted prices or drained a global oversupply of petroleum.

This won’t come as a surprise to our regular readers. We’ve been making the case for many months now that the biggest beneficiary of this production cut agreement hasn’t been its organizers, but the upstart competitors that necessitated it: American shale companies. While these oil regimes have wrung their hands about the falling price of oil and plotted ways to make the commodity more expensive, these U.S. firms have worked on bringing their operating costs down to a level that would allow them to compete in this new low-cost reality. And they’ve succeeded.

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