Oil price rises to $40 a barrel after US production cuts
OPEC is preparing to trim production of its key product by a quarter, a sign of growing concern that prices are slipping back toward levels last seen in 2016.
Oil prices jumped on Friday to a record $40.45 a barrel, the highest since May 2016, after President Donald Trump and other OPEC members announced cuts in production and halted plans to raise prices to $60 a barrel.
But analysts say the market is not ready to see that amount of U.S. oil production, which could force other producers to follow suit.
“It is a real concern because you see a lot of OPEC countries that are in this market, a lot more than a year ago, are saying they are going to cut production,” said Robert Hildebrand, an analyst at Wedbush Securities.
“They are not looking for $40 [per barrel] anymore.”
In March, OPEC agreed to cut its output by 1.2 million barrels per day to 7.8 million barrels.
But the cuts have not been fully implemented, and production has not fallen by as much.
“The market is starting to feel the effects of the cuts,” said John Hickey, an energy consultant at Sanford C. Bernstein.
The cut will cost U.N. member states $8 billion in 2017, according to the World Resources Institute.
The oil market has been in free fall since last year, when Saudi Arabia halted oil production and U.K. Prime Minister Boris Johnson announced a ban on new oil and gas exploration.
The U.P. cut output by nearly 4 million barrels a day, which was less than half the cut the OPEC leaders agreed to in a meeting in March.
The world’s biggest producer cut output in 2016, a move that was largely driven by cheap oil from the U.A.E., a U.SA.
A drop in prices has also pushed Canada and Australia to halt or suspend drilling in some areas of the North Sea.
“What we’re seeing is a big drop in oil prices, which has driven many countries to cut their production, especially in the North Atlantic,” said Stephen Tauscher, an oil analyst at the BMO Capital Markets Investment Research Group.
But with prices still higher than a decade ago, the U,S.
and European oil majors are pushing ahead with their projects in the region.
“I think the oil price is probably a couple of years away from being back to where it was before the shale boom,” Hildebeast said.
“So you’re still going to see some of the most expensive and resource intensive production, but there’s still a lot to be had.”
A price war could help the U., which relies on the export of its oil to the rest of the world, but that could be difficult as well, analysts say.
“A price drop that wipes out the global market is going to be a real problem for a lot the other oil producers,” said HildeBeast.
“You’ve got Canada and the Us that have said they’re going to ramp up production.
They’re going for oil prices in the $50 to $100 range.”