The price of a barrel of West Texas Intermediate crude oil broke above $50 on Friday for the first time in three weeks as OPEC and Russia were reported ready to announce a nine month extension of their current production restraints and to be considering even deeper cuts in an effort to curtail global supply.
U.S. crude traded as high as $50.49 on the Nymex 2.3 percent above Thursday's close. It was the first price action above $50 since April 26th, and would be the first finish there since April 20th.
OPEC members will meet on Thursday in Vienna and are expected to vote to continue the 1.8 million barrels a day reduction agreed last November, which went into effect in January, until next March.
Crude prices have been on a two week run higher after closing at $45.52 on May 4th and have added just over 10 percent. After the initial agreement late last November WIT gained 25 percent, from a close of $43.32 on November 14th to $54.06 on December 28th. Until early March WIT traded exclusively above $50.
The OPEC and Russian production agreement has been ineffective in reducing the global supply of crude oil with much of the deficit being replaced by U.S. and Canadian shale production.
Even if OPEC and Russian agree to another 300,000 to 500,000 barrels a day in additional production cutbacks there is a good chance that most of that would be replaced by U.S. producers as well.
In November 2014 OPEC tried to drive U.S. shale producers from the market and gain market share by keeping production levels high and the price low.
The price of a barrel of WIT fell sharply, from over $105 in the third quarter of 2014 to $45 in the first quarter of 2015. But substantial increases in the efficiency of North American shale producers reduced their well-head cost to an estimated $35-$40 a barrel for many fields making a majority of U.S. shale deposits profitable at similar price levels to many Middle Eastern fields.
OPEC reversed course in November last year, turning to production cuts in an effort to drive up prices. But this has been no more successful as U.S. producers have ramped up production to replace the missing OPEC and Russian supply.
Analysts now expect U.S. shale production to expand even faster with some economists forecasting a growth of 1.4 million barrels a day through December, up from an estimate of 0.9 million barrels a day.
It is likely that OPEC’s stated goal of bringing global stockpiles back to their five-year average is aimed more at putting a floor under crude prices rather than driving them back above $60 a barrel.
Since the summer of 2015 WTI has traded above $55 once and never closed there. The average price over the past year has been $45.13. That price is probably more indicative of the future than any production manipulations of OPEC and Russia.
Global prices are now determined in Texas, Nebraska and Kansas rather than Riyadh and Moscow.
Chief Market Strategist
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