Sure, the oil markets have responded to the OPEC and Non-OPEC agreement to cut production. But perhaps not quite like the cartel anticipated!
While media headlines are chock-full of reports that parties to the agreement are complying with the cuts, this time it’s different.
And that’s because they’ve underestimated the supply coming out of a new swing producer: The United States.
And that’s going to drive oil prices down in a big way. Consider …
<1> Cumbersome U.S. inventory and surging production. U.S. oil inventories are at their highest seasonal level in 30 years and production is running at its fastest clip in nine months.
And I think this is just the start. Especially on a surge in U.S. oil drilling rig activity, which last week saw the biggest one-week jump in nearly four years.
<2> Surge in corporate spending and oil-patch investment. A recent poll of more than a dozen U.S. players showed an average 60% increase in capital expenditures for oil exploration and production planned for this year! This view was echoed by global investment bank Barclay’s calling for a 50% increase in American E&P spending.
There’s also a flurry of investment activity in the shale-rich Permian Basin.
And don’t forget: U.S. drillers have become nimble and well-funded with some shale producers generating a handsome profit at $45 per barrel. When they’re making money like that, the last thing on their minds is cutting production.