How OPEC’s Extended Production Cut Could Impact Offshore Drillers
OPEC’s production cut
All major offshore drillers rallied last week (ended December 1, 2017) on the news of the extension of oil production cut. On Thursday, November 30, 2017, oil leaders agreed to extend the production cuts until the end of 2018.
At the start of 2017, the oil cartel agreed to produce 1.8 million fewer barrels of oil every day. This was one of the key reasons why we’ve seen oil prices at a 2.5-year high in recent months. Brent crude oil prices are now above $60 per barrel—almost 20% higher than one year ago.
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Oil price forecast
Goldman has raised the oil price forecast for 2018 due to OPEC’s robust commitment. It raised the Brent crude oil price forecast for next year to $62 per barrel and the WTI (West Texas Intermediate) forecast to $57.5 per barrel.
The importance of oil prices
The fate of the offshore drilling industry is closely tied to oil prices. To see an uptick in the offshore drilling, contracting activity, and day-rate oil prices need to stabilize at or above $60 per barrel. Oil prices in the range of $55–$60 could also provide support to the industry.
All else being equal, this production cut should be a catalyst for an increase in oil prices. Higher oil prices should benefit offshore drillers (XLE) like Noble (NE), Diamond Offshore (DO), Transocean (RIG), and Rowan (RDC).