| LONDON/NEW YORK
LONDON/NEW YORK Dec 7 As far as one of the
world's biggest commodities traders, Glencore's chief Ivan
Glasenberg, is concerned, the oil market will be at the mercy of
"a cat and mouse game" between OPEC and its U.S. shale rivals in
the coming year.
A 16 percent price rally over the past week has delivered
U.S. frackers a golden opportunity to hedge - or sell forward -
their production for 2017 and beyond, to shore up their coffers
against possible future price falls.
Prices for prompt Brent and WTI benchmark futures contracts
have hit their highest in nearly a year and a half, but this
rush by the shale industry to hedge has capped the rally in
prices of oil for delivery further in the future.
This will probably mean no life-support for the higher-cost
producers, at least as further-out prices remain below $60 per
barrel, and OPEC knows this.
"It's going to be a cat and mouse game between OPEC and
shale oil in America," Glasenberg said this week.
"OPEC members will say, 'if you (raise output), we are going
to ramp up production and push oil back down to $35' ... I hope
shale in America will be responsible and realise what's happened
and allow the higher oil price to be sustained," he said.
The Organization of the Petroleum Exporting Countries agreed
on Nov. 30 to its first production cut since 2008, whereby it
will reduce output by around 1.2 million barrels per day to 32.5
million bpd from January for six months.
Crucially, Russia agreed to cut output by up to 300,000 bpd
in the first half of 2017, its first joint action with OPEC
since 2001, and another 300,000 bpd in cuts are to be borne by
other non-OPEC producing nations.
NO FREE LUNCH FOR SHALE
The collapse in the premium of longer-dated oil futures
contracts in both the Brent and U.S. crude futures
markets shows how investors and producers alike are
taking OPEC at its word.
The U.S. futures curve <0#CL:> has inverted so prices for
delivery of oil in December 2017 are now above those for
delivery a year later, reflecting the wall of producer selling
that has materialised since OPEC made its announcement.
"Producers have returned very actively in the market for
hedging last week after the OPEC decision," said one source with
a bank active in the forward-selling market.
Brandon Elliott, executive vice president of corporate
development and strategy for U.S. shale producer Northern Oil &
Gas, said his company had added to its hedges.
"In some core Bakken areas, it's economical to drill in the
$45-$55 WTI price," he said, referring to the North American
Bakken shale formation.
"I would expect that as we lock in some of the low $50s,
activity picks up a bit."
Higher prices for oil for prompt delivery compared to those
for delivery in the future will guarantee OPEC countries higher
cash-flow income now, rather than further down the line, when
they ramp production back up again.
"OPEC knows this dynamic. As such they have been quite
clever by only pledging a cut lasting six months to begin with.
This tightens up the front end of the market," SEB commodities
analyst Bjarne Schieldrop said.
"OPEC would prefer though not to lift forward prices further
out on the curve. They don't want to offer shale oil producers a
free lunch with the possibility of a guaranteed, high
profitability for new projects through a high forward price."
Giving U.S. oil producers an incentive to drill more
aggressively is the last thing OPEC members want, particularly
since the group's decision in November 2014 to let prices fall
was precisely to squeeze out higher-cost shale rivals.
Venezuelan Oil Minister Eulogio del Pino said on Wednesday
OPEC is aiming for an oil price that is not "too high or too
low," around $60-70 a barrel, while his Nigerian counterpart
Emmanuel Ibe Kachikwu said he would like to see a price of $60
by December 2017.
(Additional reporting by Dmitry Zhdannikov in London; Editing
by Dale Hudson)