Huge Nation Calls out Booming U.S. Oil Production

*Note: This article is prepared by a member of KE Andrews, an ad valorem tax and valuation company specializing in the energy industry, representing over 35% of all gas plants in the U.S. and over $40 billion in pipeline*

Russia is in the news this week, on the heels of the the news that the U.S. increased their reserves by a staggering amount. Russia's state run Rosneft commented today on the OPEC cuts and how the U.S. is affecting them. Brent Crude dropped over 8% last week, landing at under $50 for the first time in over 3 months. What is interesting here is that Russia is still struggling to get down to the agreed upon 300,000 bpd they said they'd cut. They were at a reduction of 100,000 bpd based on last month's report. They are working on a gradual reduction, while Saudi Arabia is already below their target rate of 486,000 clocking in at a staggering cut of 744,000 bpd. Russia recently said this week that they may not continue the cuts, because they feel as if the U.S. is playing on unfair terms. That's counter to what two other nations think. But the reality is, the U.S. isn't an OPEC nation, we didn't agree to cut production, and things have recently been exploding in the Permian Basin of Texas. OPEC as you can see in the chart below from 2015, has a significant monopoly on the world's crude reserves.

Russia and 9 members of OPEC agreed to cut overall production by 1.8 M (bpd) for 6 months, but they're less than halfway there. Saudi Arabia is taking the brunt of these cuts, cutting production last month to under 10 M (bpd). Because they're the largest oil producer in the world, the Middle Eastern nation's cuts are sizable, often times making up for other nations not complying. They have a great incentive to reduce, saying recently that they want "$60 crude oil". Compliance based on last month's report, had the nations clocking in at a 91% compliance rate. The U.S. meanwhile, just added rigs for the 8th consecutive week via the Baker Hughes report.

Oil 1-Week Chart

The U.S. isn't a member of OPEC, that's no secret. Being the number one nation by consumption of oil, we keep so much crude here that it doesn't make sense for us to join. To be a member, counties must be a "'substantial net export of crude petroleum' and 'fundamentally similar interests' to the current members". We don't see eye to eye with all the members of OPEC, and aren't state run like Saudi Arabia, and that would prove challenging in a free market economy telling giants like Exxon and Marathon Oil to slow it down.The U.S. last week sent our oil production up to 9 M (bpd), a level not seen since April 16'. I get it. The U.S. and OPEC are going head to head, with one pushing forward and the other scaling back.

Russia in my opinion is odd to call out the U.S. for adding to their reserves, while they are slowly adhering to the OPEC cuts. They today came out and said they may not extend the OPEC cuts past May. “If OPEC doesn’t extend the deal that would be price suicide, plain and simple,” said Tamas Varga, analyst at London-based PVM brokerage. The OPEC cuts are really helping the U.S. transition into stacked plays, and lower break-even points. This will be interesting to watch as the U.S. grow their reserves and to see if Russia plays nice with their agreed upon terms.