Let Crude Crash: US Oil Producers Are Hedging At Levels Not Seen Since 2007

As warned here one month ago after the farcical OPEC meeting in Algiers, the cartel’s latest jawboning ploy to keep prices artificially higher – if only for one more month – is fast falling apart. Just a few hours ago, Bloomberg reporter Daniel Kruger penned the following assessment of the situation:

Production-Cut Talk Is as Good as It Gets for Oil. Some OPEC members are talking about cutting production again, and so prices are rising. Saudi Arabia and other producers both in and out of the cartel have done a good job fostering the storyline that there are terms under which parties can agree to pump less crude. Continuing signs of concord among producer nations have boosted oil prices to an average of $50 a barrel this month in New York. Yet several obstacles make it difficult for countries to commit to signing on to a deal. One obstacle is that sacrifices are needed for the agreements to succeed. Another is that those sacrifices aren’t shared equally.

Having successfully raised $18 billion in the bond market, Saudi Arabia is better positioned to withstand the loss of some revenue. Iraq, OPEC’s second-biggest producer, was the latest to plead for an exemption from a cut, citing its fight against Islamic State as a cause of hardship. Ultimately, no one wants to pump less because the upside is so limited. Saudi Arabia’s 2014 decision to double down on production in a drive for market share succeeded in making it more difficult for higher-cost producers to thrive as they once had. But having committed to that goal, they also locked themselves into a fight to keep what they’d won.

And while ConocoPhillips’ announcement this week that it plans to cut spending on major projects demonstrates the partial success of the Saudi plan to drive out rivals, it also shows producers see diminishing chances for crude to climb much above $60, said Wells Fargo Fund Management’s James Kochan. The big reason, of course, is latent U.S. supply. Baker Hughes data shows the most rigs at work in the Permian Basin since January. Sanford C. Bernstein analyst Bob Brackett suggests the per-acre price of drilling lease land will rise to $100,000 from about $60,000 now.  

The one agreement players seem to have reached is that oil isn’t able to go much higher.