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Thursday, 09/29/2016 3:42:50 PM

Thursday, September 29, 2016 3:42:50 PM

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Oil Hits 1-Month High As OPEC Blinks Vs. U.S. Shale

Oil futures were mixed Thursday after surging Wednesday amid some doubts about OPEC's production deal, though U.S. shale stocks rallied.

3:28 PM ET

The Organization of the Petroleum Exporting Countries agreed to a production ceiling, but is the deal a sign that the cartel has defeated U.S. shale or a testament to shale's resilience?

OPEC said in a news release late Wednesday that it will cap output at 32.5 million-33 million barrels per day to "accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward."

The cartel's daily production was 33.2 million barrels a day at the end of August. But the group won't execute the cuts until November, when full details are likely to be firmed up at an official OPEC meeting that month.

The agreement comes nearly two years after OPEC sank oil prices by refusing to trim output, choosing instead to defend market share and force higher-cost U.S. shale companies to pull back. Domestic production has fallen from last year's peak but is already starting to creep back up again, though it dipped 0.2% last week to 8.497 million barrels a day.

"I believe that OPEC has declared victory in the OPEC production war and they feel confident that they can cut production without fear that the shale oil producers will steal their market share," Phil Flynn, senior market analyst at the Price Futures Group, wrote in his daily energy report.

But while U.S. crude has struggled to top $50 a barrel, shale firms have been ramping up activity in low-cost plays like the Permian Basin, where oil can still be profitably produced.

U.S. rigs counts have been rebounding, and land oil rigs in operation will average 579 for 2017, up 29% from what's expected this year, according to a recent study by Platts RigData, a forecasting unit of S&P Global Platts.

OPEC has now realized that "U.S. oil is here to stay for the medium term at least and there will be no easy knockout blows," Omar Al-Ubaydli, an affiliated senior research fellow at George Mason University's Mercatus Center, said via email.

U.S. crude rose 1.7% to $47.83 per barrel, hitting a one-month high despite some doubts that the OPEC agreement will hold.

Exxon Mobil (XOM) fell 0.7% on the stock market today. Chevron (CVX) was down 1%, BP (BP) rose 0.6% and Royal Dutch Shell (RDSA) jumped 2.1%. Among top shale companies, Continental Resources (CLR) climbed 6.3%, EOG Resources (EOG) rose 1.1% and Diamondback Energy (FANG) was up 2.2%.
IBD'S TAKE: Exxon soared above its 200-day line and is near its 50-day line as oil rose on the OPEC deal. Continental Resources is above both lines and has a Relative Strength rating of 95 vs. Exxon's 41 as U.S. shale stocks continue to outperform oil majors. Learn more about top U.S. shale stocks in a recent Industry Snapshot.

While OPEC's agreed-upon cut is small, the big surprise was that the group could agree at all as tensions rise between Iran and Saudi Arabia, wrote Flynn, adding that the agreement should create a floor for oil prices.

But Al-Ubaydli doesn't see OPEC keeping its word and said it is merely taking markets on a "cheap ride" with a short-term rally in oil prices.

"There is a chance that OPEC officials are actually sufficiently deluded to think that they can pull this off and that they will have a rude awakening when it falls apart," he said.

The cuts also come at time when Saudi Arabia normally takes production offline after the high-demand summer season, said Jim Krane, a Middle East energy analyst at Rice University's Baker Institute, noting that the country's electricity is powered by crude.

"The kingdom was probably trying to use that natural trend to get something extra out of what they do anyway, to get some concessions from others, which tells me this is a short-term move," he told IBD. "Longer term I wouldn't expect the Saudis to budge much from their market share focus. "