OPEC, U.S. begin 'cat and mouse' oil game as producers pounce on hedges

Wed Dec 7, 2016 1:56pm EST
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By Amanda Cooper and Catherine Ngai

LONDON/NEW YORK (Reuters) - 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 realize 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.   Continued...

The OPEC flag and the OPEC logo are seen before a news conference in Vienna, Austria, October 24, 2016.   REUTERS/Leonhard Foeger