In October, when expectations were high that OPEC and Russia would extend production cuts through to the end of 2018, hopeful speculation quickly sent Brent Crude and U.S. Light Crude up by about a dollar. The reason: there was confidence that output curbs would raise prices.
Production Cuts Exceed Expectations
OPEC has agreed to extend production cuts exactly as observers expected. Moreover, member states, including Saudi Arabia, have raised compliance to record levels. The month of November saw production cuts exceed requirements under the agreement.
However, while OPEC member states have tightened up production and global oil supplies have receded from the glut levels seen only a few months ago, ready supplies still do exist. This has been a consequence of activity by U.S. shale producers, who aren’t part of the output cuts. With prices rising from OPEC’s cuts, American producers have wasted no time raising production.
Where Is Production Going?
Asia, the world’s most robust market for oil, has quickly turned to North America for its supply, with most tanker shipments to the region leaving from the U.S., Mexico, Colombia and Venezuela. According to Thomson Reuters Eikon shipping data, North American exports to South Korea, Japan, Taiwan, China and Singapore rose to more than one million barrels a day in November and December, most of it coming from the U.S.
It has been an area of concern among OPEC members – they have fretted that cutting production may not help if American producers simply step in and make up the shortfall. The situation has, in fact, turned out exactly as they feared.
According to Sigma Drilling Technologies, manufacturer of dampener solutions and pulsation control equipment for drilling contractors, American oil production has touched 9.68 million bpd in December. American drillers have been the winners in this scenario with OPEC cutting production.
