The OPEC’s decision to curb oil output for the first time in 8 years resulted in an 8 percent surge in oil price. Experts see the move as a realization that the hope of drowning producers with cheap oil was a failed effort to kill the American oil boom. The big questions here is: “Whether the strategy to reduce production hurt the American oil and gas industry, and whether it will be beneficial for fracking companies and investors”? To answer the questions, we analyze the move and aftermath, so far.
The Finer Lines
Two years ago, when the world started over-producing crude oil, the global oil price crashed from $100 to $40 per barrel. OPEC (The Organization of the Petroleum Exporting Countries), a permanent, intergovernmental organization representing a union of 13 major oil exporters, has now decided to cut oil production by 1.2 million barrels/day, in a bid to drain record global oil inventories. OPEC currently produces 33.7 million barrels of oil per day, which will be reduced to 32.5 million barrels per day in 2017. OPEC, by cutting the production, aims to bring bloated oil stockpiles back to normal, which may increase the crude oil price up to $60 per barrel.
Impact on the U.S. Oil Supply and Demands
The decision by the OPEC has already given a boost to energy stocks, increasing the oil prices by about 10 percent last week. The news has also impacted the price of crude oil in the US, which is trading 1.1 percent higher at $49.99 a barrel, and expected to rise. A few experts believe that OPEC’s decision to cut on the production might give an immediate boost to oil prices, which means its impact on the US economy and consumers might be more modest and gradual. If OPEC sticks to its decision to cut back on production, it could encourage fracking companies to increase their output. Those who have paused production might start drilling again, to balance the demand and supply and stabilize the prices.
Wrapping Up
The crude oil production in the U.S. is now reduced to 8.7 million barrels per day, with OPEC losing a part of its market share. The deal may increase oil prices through first half of 2017, but all U.S. tight-oil plays might be benefited from the move in the long run. Though it would be premature to comment on how the decision to reduce production would fare in the long run, chances are, it might actually work in favor of U.S oil companies and investors. If you wish to learn more about the future of oil and gas investments, or how the decision would impact your portfolio and returns, feel free to speak with one of our consultants.
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