June 20–The Texas oil boom and the higher crude prices that have driven it could take hits after OPEC meets in Vienna Friday, as the strengthening alliance between Saudi Arabia and Russia pushes the cartel to lift production caps and increase output.
The Saudis are seeking to undo, or at least relax, an agreement reached in late 2016 between the Organization of the Petroleum Exporting Countries, Russia and other major producer to curb production by a combined 1.8 million barrels a day in an effort to drain a worldwide oil glut and lift prices. The strategy has largely worked and now Saudi Arabia, which bore the brunt of the production cuts, is looking to cash in on the higher prices it helped create.
But Friday’s meeting threatens to be contentious as other OPEC nations, including Iran, Iraq and Venezuela, oppose any production increases, worried about replenishing the dwindling oil glut and undercutting prices. The Iranian oil minister, Bijan Namdar Zanganeh, vowed Tuesday to reject any compromise that would increase output.
What happens in Vienna is, of course, critical to the energy industry in Houston, Texas and the United States, which has benefited immensely from OPEC’s success in lifting crude prices. Since the OPEC accord was reached, the United States, led by West Texas’ Permian Basin, has driven the growth in global oil production, increasing daily output by nearly 25 percent to a record 10.9 million barrels a day, surpassing Saudi Arabia as the world’s second-biggest oil producer, and closing in on the leader, Russia.
The Saudi-Russian partnership is a direct result of shale drilling boom here, analysts said, as both countries look to counter surging production in the United States and hold onto market share.
“The U.S. is the big scary beast that continues to be a burr in their saddle,” said Ian Nieboer, director and analyst with the RS Energy Group, a data and research firm.
The combination of rising prices and record production has meant solid profits for Houston’s energy companies, which, in turn, is boosting manufacturing, professional services and other sectors connected to oil and gas. Overall employment in the Houston area is growing at the fastest rate since 2014; over the past year, the Houston area has added nearly 90,000 jobs.
Oil prices, however, have already retreated on prospect that OPEC and its allies will turn up the taps. U.S. prices, which climbed above $72 a barrel at the end of last month, have retreated to about $65. Brent crude, the international benchmark, rose above $80 a barrel, but is now trading at about $75.
Those prices are still high enough to provide healthy profits, but the question remains how far and how fast OPEC might lift the production caps. That issue has been complicated by several other factors, including the economic collapse in Venezuela that has vastly diminished the country’s oil production, the instability of another OPEC member, Libya, and the sanctions imposed on Iran by the Trump administration, which is keeping hundreds of thousands of barrels of Iranian oil off the market.
And if these developments haven’t given Saudi Arabia and Russia enough leeway to increase production, then President Donald Trump wants to give them more. Trump recently blamed OPEC for oil prices that were pushing gasoline toward $3 a gallon, signaling the Saudis to open spigots, and further infuriating their hated regional rival Iran, which is unable to follow suit.
“This is the trickiest OPEC meeting in years,” said Matt Reed, vice president at Foreign Reports, a consulting firm focused on Mideast oil politics. “They’re asking themselves how much oil needs to come back on the market, but that number is a moving target. Venezuela is bleeding out, sanctions loom over Iran, and Libya is a wild card again.”
While the Saudis and Russians are pushing to increase production by 1.5 million barrels daily, they’ll likely settle for a compromise that would boost output by less than 1 million barrels a day, analysts said. More than ever, Saudi Arabia and Russia want to find the right balance between supply and demand.
“It could be a good thing. Both countries are allergic to low oil prices,” Reed said of the Saudis and Russians. “So they’ll try to keep a floor under crude prices that’s probably good enough for U.S. producers.”
Analysts said any price above $60 should keep the U.S. oil and gas companies profitable.
Pavel Molchanov, an energy analyst at Raymond James in Houston, said he doesn’t expect the OPEC meeting to affect U.S. energy activity much because the production cut agreement was due to expire at the end of this year anyway. The Venezuelan crisis that is undermining production there shows no signs of abating, he said, and most smaller OPEC countries don’t have the capacity to increase production much more.
And even if OPEC and its partners lift the output caps, it will take some time for the drilling and production activity to pick back up.
“Oil fields aren’t like a light switch,” Molchanov said. “You don’t turn on an oil field on Dec. 31 to get new production Jan. 1.”
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