On a cold winter evening in Vienna, members of OPEC confounded the world. The group, notorious for its internal disputes and questionable compliance record, agreed to its first production cut in 8 years despite some disagreement between Iraq, Iran and Saudi Arabia continuing into the 11th hour. Furthermore, OPEC convinced non-members, including Russia, to take part in the cuts, themselves hoping to benefit from a return to the days of $60+ per barrel.

Crude oil prices sharply rallied as a result, with the global benchmark Brent Crude rallying from $47 on 29 November to $54 by 1 December. Yet since then, Brent has only traded above $58 in one session (3 January) and has not fallen below $54 yet in 2017, having briefly traded at $53 in early December.

As this trading range, becoming increasingly tight, begins its third month, many investors are now asking how long might we see this range continue for?

To answer this, the focus for many remains rising US crude production. The young threat to OPEC’s dominance caused a stir in 2014 when, in a preemptive move, Saudi Arabia ordered other members to effectively turn the tap on production in hopes of quite literally flooding their US rival from the market.

It almost worked. With the price of Crude dropping to below $30 for the first time in over a decade, the previously prosperous US producers were forced to cut costs significantly and were almost forced out of the market as a whole. However, this sharp fall in Crude’s profitability also hurt OPEC producers. With many states facing domestic economic problems, members were forced into the agreement to curb output in the hope of addressing concerns back at home.

US Crude production has returned with a vengeance. Having worked to cut costs during Crude’s dark days of >$30 per barrel prices, producers in the States are enjoying profits new cost-efficiency and rising oil prices. Consequently, a rapidly increasing amount of US producers are coming back online.

US government Crude Oil inventories and the Baker Hughes Rig Count, both released weekly, have seen a significant amount of positive readings so far in 2017; the former has seen only a single drawdown this year, while the latter has seen a 12% increase since 1 January to its highest level since October 2015. Furthermore, a promise by President Donald Trump to increase the use of fossil fuels, highlighted by two executive orders to complete oil access pipelines in January, seems set to continue the stateside crude oil uptick.

This has kept a lid on the post-OPEC production cut agreement rally, as the global Crude Oil market remains relatively well-supplied. Officials from the group are happy with the pace of the production cuts and, thanks to record compliance of over 90% from participating countries, they believe that the global supply will be re-balanced by the time their agreement ends in June.

As a result, we are stuck in the midst of a tug of war. Without a catalyst emerging from either side to break the stalemate – either OPEC committing to further cuts beyond its current 6 month agreement or any foreseeable de-escalation of the US crude production resurgence – it seems that we could be range bound for quite some time.

Henry Croft, Research Analyst, 1 March 2017