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Abu Dhabi, UAEWednesday 19 September 2018

Historic Opec pact may spur drillers in the US

Nine-month extension strengthened by inclusion of Nigeria and Libya, two Opec members originally exempted

Alexander Novak, Russia's energy minister, left, alongside Khalid Al Falih, Saudi Arabia's energy and industry minister in Vienna last November. Russia is compliant with Opec production cuts that aided the recovery of oil prices. Akos Stiller/Bloomberg
Alexander Novak, Russia's energy minister, left, alongside Khalid Al Falih, Saudi Arabia's energy and industry minister in Vienna last November. Russia is compliant with Opec production cuts that aided the recovery of oil prices. Akos Stiller/Bloomberg

Thursday’s historic agreement by Saudi Arabia, Russia and other major crude producers to extend supply caps for another year may prompt directors to spend more on drilling.

That is because the producer group’s restraint has meant higher prices for US shale drillers, who have not been shy about hiring more rigs or flooding global markets with more cargoes.

After climbing out of a crater dug by the worst oil-market collapse in a generation, North American explorers probably will boost spending by 20 per cent next year, according to an Evercore ISI survey of industry budget trends. That would follow an estimated 41 per cent jump in 2017.

“The North American E&P industry is very itchy to spend more capital dollars,” said James West, an Evercore analyst. “They’re in the board rooms right now talking about budgets and Opec is saying what they’re going to do through 2018.”

The nine-month extension was strengthened with the inclusion of Nigeria and Libya, two Opec members originally exempted from the curbs. Oil stockpiles in developed countries are still 150 million barrels above a five-year average, leaving Opec and its allies with more work to do, Saudi Arabia’s energy minister Khalid Al Falih said Thursday.

Saudi Arabia and Russia displayed unprecedented unity in Vienna on Thursday with Mr Al Falih saying he and his Russian counterpart Alexander Novak stood “shoulder to shoulder”. The show of friendship sought to dispel fears flagged by Wall Street analysts about Moscow’s reluctance to keep its side of the bargain in the absence of an exit strategy for the deal.

“[Thursday's] meeting established a very firm confidence in the market that the cooperation between Saudi Arabia and Russia specifically and their agreement is no fly-by-night and it is here to stay,” said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo.

“The downside risk to oil prices was taken away last evening and a sub-$50 risk for Brent is now gone unless we have a global recession.”

Benchmark Brent was at US63.61 per barrel at the close on Friday and wti AT $5825.

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