On OPEC’s Production Target

Donald L. Luskin
Michael Warren
Thursday, September 29, 2016
Freezing production that was frozen anyway makes the US fracker the swing producer.
Strategic view: 

OPEC has announced a production target that amounts to a freeze at current levels, and will take until November to be detailed and agreed by members. This is mostly a face-saving exercise, to mask the fact that OPEC spare capacity is quite low – so production is effectively frozen with or without the target. That means prices will go higher in any event, with global demand likely to far outstrip supply a year out, and storage now getting back in line with historical norms. OPEC wants this agreement to hide the fact that the US fracker is now the global swing producer. Shale production is ramping up now in the Permian, where wellhead and transport costs are globally competitive at today’s prices. As prices rise, other plays will ramp up despite higher transport costs, the sad result of the failure to approve and build new infrastructure. We stand by our call for $65 oil by year-end.

Author Override: 
Michael Warren and Donald Luskin