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OPEC, U.S. begin ‘cat and mouse’ oil game as producers pounce on hedges

By Amanda Cooper and Catherine Ngai | LONDON/NEW YORK

As far as one of the world’s biggest commodities traders, Glencore’s chief Ivan Glasenberg, is concerned, the oil market will be at the mercy of “a cat and mouse game” between OPEC and its U.S. shale rivals in the coming year.

A 16 percent price rally over the past week has delivered U.S. frackers a golden opportunity to hedge – or sell forward – their production for 2017 and beyond, to shore up their coffers against possible future price falls.

Prices for prompt Brent and WTI benchmark futures contracts have hit their highest in nearly a year and a half, but this rush by the shale industry to hedge has capped the rally in prices of oil for delivery further in the future.

This will probably mean no life-support for the higher-cost producers, at least as further-out prices remain below $60 per barrel, and OPEC knows this.

“It’s going to be a cat and mouse game between OPEC and shale oil in America,” Glasenberg said this week.

“OPEC members will say, ‘if you (raise output), we are going to ramp up production and push oil back down to $35’ … I hope shale in America will be responsible and realize what’s happened and allow the higher oil price to be sustained,” he said.

The Organization of the Petroleum Exporting Countries agreed on Nov. 30 to its first production cut since 2008, whereby it will reduce output by around 1.2 million barrels per day to 32.5 million bpd from January for six months.

Crucially, Russia agreed to cut output by up to 300,000 bpd in the first half of 2017, its first joint action with OPEC since 2001, and another 300,000 bpd in cuts are to be borne by other non-OPEC producing nations.


The collapse in the premium of longer-dated oil futures contracts in both the Brent LCOc1 and U.S. crude futures markets CLc1 shows how investors and producers alike are taking OPEC at its word.

The U.S. futures curve <0#CL:> has inverted so prices for delivery of oil in December 2017 are now above those for delivery a year later, reflecting the wall of producer selling that has materialized since OPEC made its announcement.

“Producers have returned very actively in the market for hedging last week after the OPEC decision,” said one source with a bank active in the forward-selling market.

Brandon Elliott, executive vice president of corporate development and strategy for U.S. shale producer Northern Oil & Gas, said his company had added to its hedges.

“In some core Bakken areas, it’s economical to drill in the $45-$55 WTI price,” he said, referring to the North American Bakken shale formation.

“I would expect that as we lock in some of the low $50s, activity picks up a bit.”

Higher prices for oil for prompt delivery compared to those for delivery in the future will guarantee OPEC countries higher cash-flow income now, rather than further down the line, when they ramp production back up again.   

“OPEC knows this dynamic. As such they have been quite clever by only pledging a cut lasting six months to begin with. This tightens up the front end of the market,” SEB commodities analyst Bjarne Schieldrop said.

“OPEC would prefer though not to lift forward prices further out on the curve. They don’t want to offer shale oil producers a free lunch with the possibility of a guaranteed, high profitability for new projects through a high forward price.”

Giving U.S. oil producers an incentive to drill more aggressively is the last thing OPEC members want, particularly since the group’s decision in November 2014 to let prices fall was precisely to squeeze out higher-cost shale rivals.

Venezuelan Oil Minister Eulogio del Pino said on Wednesday OPEC is aiming for an oil price that is not “too high or too low,” around $60-70 a barrel, while his Nigerian counterpart Emmanuel Ibe Kachikwu said he would like to see a price of $60 by December 2017.

OPEC’s struggle

The Organization of the Petroleum Exporting Countries agreed in Algeria on Sept. 28 to limit supply, with special conditions given to Libya, Nigeria and Iran, whose output has been hit by wars and sanctions. OPEC ministers met in Vienna on Nov. 30 and agreed to curb production by around 1.2 million barrels per day from January, in the first output cut since 2008.

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Crude-oil supply

In millions of barrels a day

(Additional reporting by Dmitry Zhdannikov in London; Editing by Dale Hudson)


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