OPEC weighs continuing oil production cuts as shale surges

A powerful consortium of oil producers that includes Saudi Arabia and Russia will try to goose lackluster oil prices this week with promises to extend previous output cuts for several months and perhaps into next year.

At a semiannual gathering in Vienna on Thursday, Saudi-led OPEC and other oil-producing nations are expected to strike a deal that would continue or possibly even deepen output cuts that stabilized the unruly oil market. These nations began reducing production in January.

Higher crude prices would fatten profits for oil companies and energy services firms that make up the core of Houston's economy, which is already poised for faster growth in 2017 after struggling through a two-year oil bust. So far, though, OPEC's cuts haven't curbed the global oil glut nearly as much as anticipated, as $50-a-barrel oil fueled a U.S. drilling recovery that threatens to counteract the cartel's efforts to lift prices.

"It's a battle over barrels," said Robert McNally, president of the Rapidan Group, an energy consultancy. "All we know is the market rebalancing keeps getting delayed."

In December, the U.S. Energy Department forecast that daily oil production outside of OPEC would only increase by about 600,000 barrels in 2017.

But now it projects daily output will rise by nearly 1.4 million barrels this year, spurred most of all by a surge of shale drilling that could lift American oil production next year past its 1970 record of more than 10 million barrels a day. Surging oil production in Brazil and Canada, and recoveries in Libya and Nigeria, may also offset the cuts by the Organization of the Petroleum Exporting Countries.

All this has diminished OPEC's influence over global oil markets. Last year, OPEC officials almost doubled the price of oil by merely talking about the possibility of capping oil production, even though they boosted output by 1.4 million barrels a day.

But so far this week, signals from Saudi Arabia and Russia that the group is already close to an agreement haven't caused prices to spike like they would have just five years ago, analysts said.

"There's a recognition that the world has changed," said Jamie Webster, a fellow at the Center on Global Energy Policy at Columbia University.

Oil traders also have grown increasingly skeptical of OPEC's production cuts in part because oil exports are still flowing at full speed from several OPEC producers to overseas buyers.

OPEC's exports to the United States, for example, have risen 9 percent in the first few months of the year compared with the same period last year, according to energy research firm ClipperData, which tracks oil vessels. The month, however, OPEC's exports declined significantly, the firm discovered.

Some analysts believe the cartel may have sold off oil it had kept in storage in a bid to maintain revenues as it slowed production. That could be a big reason oil inventory levels in oil-importing countries like the United States haven't dropped as far or as fast as OPEC expected.

Last year, OPEC's export revenues dropped to their lowest point since 2004 at about $433 billion as prices fell to the lowest levels in more than a decade, bottoming at $26 a barrel in February 2016. But as prices climb, the group's export sales could increase to $539 billion this year, despite its oil production cuts, the Energy Department said last week.

At the moment, OPEC's 13 member countries and 11 other nations appear to be on the verge of reaching a deal this week. These two-dozen countries had agreed in December to slash output by a combined 1.8 million barrels a day over six months, hoping to reduce bloated global oil inventories to the five-year average and lift prices to support their oil-dependent economies.

This week, Iraq agreed to support a move to extend the cuts after a visit by Saudi Arabia's energy minister, Khalid Al-Falih, appeared to quell tensions. But analysts say it's foolhardy to assume other obstacles won't arise that could prevent OPEC from reaching a deal.

"There's plenty of kindling for an explosive discussion," McNally said. "You never know with OPEC. One producer can upset the whole apple cart."

For example, it's not yet clear how long OPEC might extend its cuts. Falih has argued extending oil production cuts of 1.8 million barrels a day through the first quarter of 2018 would bring global oil storage levels back down to the five-year average.

Other countries like Kuwait and the United Arab Emirates have said there is still a debate among the producers over whether they should extend cuts for just six months rather than nine.

Issam Almarzooq, the Kuwaiti oil minister, warned on Tuesday that not all of the oil-producing countries have agreed it's necessary to extend the cuts by nine months, according to media reports.

U.S. oil prices settled at $51.47 a barrel on Tuesday, rising 34 cents in a sign traders have baked into the price of oil an expectation that OPEC and its non-OPEC rivals will make a deal to keep output capped.

"OPEC would have to go above and beyond to give prices a lift," said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. "If it broke down, that would truly send prices into a tailspin."