Oil price: new unimproved Opec+ helps US shale drillers

Opec+, the enlarged oil cartel including Russia, is one of those “new and improved” products whose only real novelty is its fresh wrapper. The decision of Saudi Arabia, Iraq and peers to cut production by more than 1.1mn barrels per day smacks of traditional panic. It comes not long after November’s 2mn-barrel reduction. The move will benefit Russia and US shale oil drillers as much as longstanding Opec members.

Crude prices are a barometer of world economies. Of late, prices have been attempting to reflect higher interest rates and slowing growth. Prior to Monday’s 5 per cent lurch to over $84 per barrel, Brent had fallen a quarter year on year.

That has rattled Opec+, impelling members to pledge cuts outside more formal mechanisms. The Saudis and the Russians are worried about falling global crude demand. Inventories in the first quarter had already picked up more than expected — about 700,000 barrels per day — according to Citi estimates. Banking turmoil has exacerbated angst.

Yet China’s return to normalcy should have bolstered confidence. Traffic has picked up in China, the world’s second-largest oil consumer. As of March, road transport activity had climbed above average levels seen throughout 2019, according to Rystad Energy. That was also true for the US and Germany. Road vehicles are responsible for more than 40 per cent of global crude demand.

Russia is hardly going to quibble about cuts from the likes of Saudi Arabia. It needs revenues too desperately to do any more itself than extend an earlier reduction of 500,000 barrels until the end of 2023. US shale companies win too. Opec+ has decided it can live with the threat of them increasing supplies. Including oil derived from natural gas, almost 1mn barrels per day more flowed from their wells this February compared with last.

Shale groups will drill more despite high input costs. They have oodles of capital to deploy. In the largest production region, the Permian, three of the biggest US shale drillers Chevron, Conoco and Exxon already have 40 years worth of production in reserve.

The surprise Opec+ announcement puts a short-term floor under prices. Chinese demand should pick up into the summer. But the world’s economies remain fragile. Unless there is serious disruption to supplies from left-field political events, oil should stay under $100 per barrel for most of this year.