Today at 7:25 AM ET, US crude oil prices have fallen by 0.5%. According to a CNBC report, OPEC+ members might increase the current production cut by 0.5 MMbpd (million barrels per day). The increase would be a significant step by OPEC+ to push oil prices higher. However, no official announcement has been made yet.
Will there be a burden?
If a common consensus is achieved between OPEC+ members on an additional output cut, oil prices could rise more. The total production cut would rise to 1.7 MMbpd. Saudi Arabia might take the maximum burden of an increased production cut among OPEC members.
A deeper cut is necessary for Saudi Arabia because of Aramco’s IPO. Read Saudi Aramco IPO Arrives: Did Baghdadi’s Death Help? to learn more. We discussed the possible reason behind Aramco’s listing in Crude Oil Prices: After Inventory, Watch OPEC+.
Last time, when OPEC+ members agreed to cut the output, the burden was shared in a 2:1 ratio among OPEC and non-OPEC members, respectively. OPEC’s members decided to reduce the output by 0.8 MMbpd. The other 0.4 MMbpd was shared by non-OPEC members.
Will oil prices reach $100?
The last time WTI or US crude oil active futures closed above $100 was during July 2014. In fact, after the 2015–2016 oil glut, US crude oil prices only settled above $70 in a few instances.
The reason is straightforward. WTI crude oil above $100 would encourage US shale oil producers to accelerate their production. At this rate, their oil output would be highly profitable. To learn more about US oil producers’ breakeven cost, read A Look at Breakeven Prices and Trends in Eagle Ford Well.
So, a temporary rise in oil prices between $70 and $100 could be possible. However, in the long term, active WTI futures might not able to stay that high. The United States Oil Fund LP (USO) closely tracks WTI crude oil futures.
Interestingly, in today’s trade, the Brent-WTI spread has contracted to $3.81—the lowest since July 2018. Usually, when foreign producers cut their oil supplies, Brent outperforms WTI crude oil futures. The same is true when the geopolitical tension rises in the Middle East.
The fear of rising oil production in the US could be behind the Brent-WTI spread’s contraction. However, OPEC+ plans for another round of output cuts.
The Brent-WTI spread is also important for US oil exports. A higher spread is useful for US oil exporters to cover their transportation expenses. In the past, US oil exports lagged the Brent-WTI spread. To learn more, read How Brent-WTI Spread Is Affecting Oil Exports and Energy Stocks.