OPEC Steepens Cuts by 500 KBPD

Oil prices ended yesterday at exactly the same level they began on quiet news. This morning, a surprise announcement from OPEC indicates the group will seek to cut oil production by 1.7 MMbpd in Q1 2020, an additional 500 kbpd beyond current production cut levels. Crude markets are reacting with large gains, with crude oil up $1.07 per barrel to trade at $59.50.

Fuel prices are seeing a lift as well. Gasoline prices are currently trading at $1.6581, up 3.7 cents. Diesel prices are $1.9649 currently, a gain of 3.2 cents from Thursday’s close.

The production cut agreement comes as a surprise to the market, particularly after yesterday’s lack of commentary. While the 2019 production cuts were meant to cut 1.4 MMbpd, actual cuts were closer to 1.2 MMbpd due to non-compliance. Now that the agreement is struck, the next step will be enforcement. Saudi Arabia has been putting pressure on countries such as Iraq and Nigeria to comply with their quotas, with some even rumoring they’ve threatened to flood the market if countries don’t comply.  The 500 kbpd of additional cuts will be split, with 350 kbpd coming from OPEC and 150 kbpd from non-OPEC members. The group is set to re-evaluate cuts in March 2020; currently all cuts expire at the end of the first quarter of the new year.

The OPEC cuts come as many are growing concerned over America’s shale oil production growth. The fracking revolution propelled the US to the preeminent market position, but the companies behind it are facing severe financial struggles. With oil prices stagnant and concerns over future demand, investors are growing stingy with their funding, leading many companies to become cash-strapped. Chesapeake Energy, one of the companies at the forefront of the shale revolution and once the largest gas producer in the US, is struggling on the brink of bankruptcy. Fifteen producers this year have been forced to declare bankruptcy. US production isn’t going away – we have the oil, and we now how to extract it profitably. But over the next year or two, we may see some production volatility as companies scale back or merge with others to avoid financial hardship.