(TYLER MORNING TELEGRAPH/AP) - Oil prices spiked on Wednesday, following news that OPEC agreed to cut its production for the first time since 2008. The international benchmark for crude jumped 8.3 percent, or $3.86, to $50.24.
East Texas oil producers are cautiously optimistic.
“Assuming OPEC nations hold to the terms of the agreement, this is very good news,” said Fair Oil Co. President and CEO Bob Garrett. “It’s a signal that OPEC has given up on its attempt to run the shale drillers out of business – they’ve realized they can’t. It’s a sign OPEC countries are going to be more strategic in their decisions, which is good.”
The reduction of 1.2 million barrels a day is significant, leaving OPEC’s daily output at 32.5 million barrels. And OPEC President Mohammed Bin Saleh Al-Sada said non-OPEC nations are expected to pare an additional 600,000 barrels a day off their production.
But according to Gates Brelsford, the Tyler Area Chamber of Commerce’s Energy Committee chairman, that’s a big “if.”
“Traders and other experts do question how well the production cuts will hold. OPEC had cut production in the past, and sometimes with limited success,” Brelsford said. “Russia is in for a cut of 300,000 barrels of oil per day in the agreement, and is not historically a reliable partner. Iran is still increasing their production following lifting of the sanctions, although those increases could occur slowly. Iraq can’t cut now either, due to the cost of fighting ISIS.”
Still, he said, “This is a big deal.”
“The beneficial effect of the hoped-for production cut of 1.2 million BOPD would be to decrease the worldwide supply glut of oil,” Brelsford said. “If the supply reduction holds, we could see West Texas Intermediate trade consistently over $50 a barrel.”
And that could spur significant activity in the oil patch, and it could happen quickly, Fair Oil’s Garrett explained.
“The companies that have survived this have an inventory of projects they’d like to develop,” he said. “We’re ripe for a flurry of activity, if operators perceive there’s some longevity to the price stabilization.”
OPEC’s Al-Sada said the OPEC cutbacks are in effect for six months with the option of renewal after a review by a five-nation committee set up to monitor compliance.
Still, analysts suggested price upswings would be relatively moderate - and the fallout minimal, at least for the United States. Sal Guatieri, senior economist at BMO Capital Markets, said oil should rise to an average $53 a barrel next year.
For the U.S. economy, that’s “a sweet spot ... a high-enough price to spur investment in the energy industry but not enough to seriously drain purchasing power” of consumers, he said.
East Texas producers agree, but warn that overreaction to Wednesday’s price spikes – via overproduction – could set the industry back again.
“What we really don’t understand yet is how fast, given the technology we have now, we can oversupply the market again,” Garrett cautioned. “When prices start making it economical to develop some of these projects, we’re going to be in a position to produce a lot of oil in a short amount of time.”
Consumers shouldn’t see higher gas prices right away, analysts say.
“We still have a lot of supply we need to chew through,” Garrett said.
The local economic impact could be palpable, Brelsford explained.
“The upside for employment in East Texas is the local energy industry as a whole could get a boost, or at least help limit more layoffs as 2017 progresses,” he said. “We do see a slight uptick in energy-relating hiring in our business.”
Added Garrett, “There’s a lot of optimism in our industry right now.”
Tyler Morning Telegraph