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Since last Friday's close, crude oil prices have dropped just over 4%. The reason is simple: concern over rising U.S. shale oil production.
Indeed, ever since the Nov. 30 meeting in Vienna where OPEC promised to cut oil production, the U.S. response has been the focus of global markets.
What happens here may well decide whether OPEC's Vienna Accord is successful or not.
Oil Is Still Too Low for (Most) U.S. Producers
Of course, an increase in U.S. oil production was guaranteed by the spike in prices that followed the Nov. 30 OPEC decision to cut/cap production – the Vienna Accord. Through Dec. 28, WTI (the benchmark crude rate traded in New York) had increased 19.5% for the month. The 45% improvement for the year was the best since 2009.
And as of close yesterday, the benchmark is up 98.2% since its low for the year ($26.21 on Feb. 11).
In a broader perspective, however, as of open this morning, WTI remains 31.5% below its price in mid-November 2014, just before the OPEC decision to defend market that sent oil prices crashing.
All of which sets the stage for what's really happening in U.S. production.
At the current range of $52 to $54 a barrel – the price I had initially predicted back in September for close-of-year levels – you can expect changes in American production volume.
That is especially the case with shale and tight oil, which has transformed the United States from relying on imports to having genuine expectations of energy independence.
Barely seven years ago, the widely shared assumption was that more than 70% of daily crude oil needs would have to be imported into the U.S. by 2020. These days, that import figure is closer to 40%, with any increases in the amount of oil brought down to refinery margins, not domestic oil demand.
The production/import balance, therefore, is a much more nuanced one than had been the case when imports ruled the market.
And today's oil price sits in the center of a massive tug-of-war.
Soaring U.S. Production Could Scuttle the OPEC Oil Deal
If American production increases markedly, it will put pressure on OPEC's continued abidance to the accord. That agreement, in turn, serves as the foundation for OPEC's deals with Russia and other non-cartel producers.
Should U.S. extractions begin to accelerate, the entire fabric of the Vienna Accord begins to unravel. The United States is not party to the accord and had no involvement in the Vienna meetings in which it was hammered out.
But what happens here may well determine international pricing dynamics going forward. Oil prices are currently below the level necessary to make most fields in the U.S. profitable, especially shale/tight production that requires something closer to $63 to $65 a barrel on average.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.