After climbing yesterday by 1.7% on news that OPEC and allies including Russia would extended their agreement to cut production through the end of the year, oil rallied again today. U.S. benchmark West Texas Intermediate closed up 1.64% to $58.34 a barrel. International benchmark Brent crude climbed 1.68% to $63.68 a barrel.
The big surprise in yesterday’s announcement was that OPEC members Libya and Nigeria joined the agreement to cut production. Previously the two countries had been permitted to produce at will in order to make up for violence in those countries that had devastated their oil infrastructure.
Hanging over the oil market, however, remains the question of what U.S. oil shale producers will do in response to the OPEC agreement. Many products have hedged most of their production for 2018, meaning that the only way that these companies can participate in the increase in oil prices is to increase their own production. That’s relatively easy for producers working in oil shale geologies, especially when companies have a big backlog of almost-complete wells that they have drilled and that require very little time or expense to bring into production.
Last week U.S. producers pumped 9.68 million barrels a day, according to the U.S. Energy Information Administration. That is the highest level of production in more than three decades. Baker Hughes reported that the number of working oil rigs expanded by two to 749. That’s the highest total since September.
Traders in the futures market have increased their bullish Brent crude oil bets by 11,739 net-long positions to 537,979, the most bullish level in three weeks, according to the weekly ICE Future Europe data. The OPEC news, Socete Generale speculates, encourages selling of out of the money Brent call options above $70 a barrel and put options below $55 a barrel on 2018 contracts.