Market Insider

OPEC's 'truce on oil prices' could be quickly shattered by more shale production

Workers tend to a well head during a hydraulic fracturing operation outside Rifle, Colorado.
Brennan Linsley | AP

OPEC's promised production deal will probably prop up oil prices, but it may also jump-start more U.S. shale drilling — which would go against the very reason the cartel started a price war in the first place.

Analysts at both Bank of America Merrill Lynch and Citigroup pointed to the possibility that OPEC's move toward a production cut would drive up oil prices, and that might encourage more drilling by the shale industry, which has finally seen rig counts pick up and production levels stabilize after a steep decline.

BofA anlysts said Thursday that flow rates in the Permian basin of Texas and New Mexico have improved in recent months, meaning U.S. shale players are getting more oil out of the ground with better technology.

"Worryingly for the cartel, production in the West Texas region has already started to increase sequentially. Stated differently, OPEC has declared a truce on oil prices. But relentless improvements in shale technology will keep Saudis awake at night wondering if they have made the right choice," the analysts wrote.

"The $45 level was starting to bring them back. They're driving down costs all the way through the production chain," said John Kilduff of Again Capital. But shale drillers could also add more supply to the already oversupplied market, and that would cap gains in oil.

Some industry experts believe more drillers could put rigs back in operation at $50, but in order to see a real resurgence, oil needs to be at $60 per barrel.