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Is hiking production the best way to cope with low oil prices?

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The only way for oil producers to cope with the low price of crude is to hike rather than cut production, an industry analyst told CNBC.

Natixis Lead Oil Market Analyst Abhishek Deshpande said that both the Organization of Petroleum Exporting Countries (OPEC) and Western producers were working hard to maintain oil levels—simply as a matter of self-preservation.

Related: Kings of Crude: US vs OPEC

“They’re left with no choice,” Deshpande told CNBC on Monday.

Both OPEC and Western producers want to keep production high, but their motivations are different, said Deshpande.


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OPEC is trying to preserve its market share and offset losses from low prices with an increase in sales, he told CNBC. However, Western producers are ramping up production to service a growing debt pile.

“They have taken large amounts of loans to drill rigs on a weekly basis or monthly basis—how do they pay back this money? The only way you can pay back this money is by keeping on drilling,” Deshpande said.

“If you stop drilling, basically the music stops.”

Brent crude oil gained on Monday, after hitting a six-month low of $48.25 per barrel in early trade. The low point came in the wake of the weekend’s mixed Chinese trade data and a report on Friday on increased rig count across the U.S.


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Brent prices were up around 3.25 percent at $50.19 in afternoon trade in the U.S. The price of North America’s oil benchmark, West Texas Intermediate (WTI), settled up 2.48 percent at $44.96 per barrel.

However, both Brent and WTI are down around 50 percent on level seen from 2011 until the first half of 2014.

Deshpande added that U.S. producers had also probably tried to hedge for falling oil back in May and June, when prices were better supported.

“Basically what they’ve done is kick the tin down the road by, probably, hedging,” he said.


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“But it’s not a sustainable solution and sooner rather than later you will see some downgrades, especially some companies coming under pressure.”



Miswin Mahesh, an oil analyst at Barclays in London, said there was a risk of upcoming earnings from oil producers disappointing, after optimistic guidance.

“At these prices, there’s risk that the guidance would be surprising to the downside,” he told CNBC on Monday.

Related: Tight oil is here to stay, Conoco CEO tells OPEC

Still, Barclays maintains a relatively positive yearly outlook on oil prices, forecasting an average price of $61 per barrel for Brent crude in 2015. It forecasts an average of $61 per barrel in the third quarter and up to $66 per barrel in the last three months of the year.

“The market will be surprised by how strong demand is,” Mahesh said, adding that current demand data was underreported.

Deshpande was less optimistic, forecasting a bear market for the rest of the year. Furthermore, he said further pressure could push Brent prices as low as $40 per barrel in the first quarter of 2016.

www.cnbc.com

1 Comment on "Is hiking production the best way to cope with low oil prices?"

  1. This practice seems out of the norm considering in the past American production ground to a halt. We must consider this. We have developed an incredible amount of producing assets now compared to the last boom years. Simple daily production dwarfs what we had produced in the past. We also have realized that we have too much at stake to be controlled by an OPEC bully that has historically forced us to decline on demand. We are realizing that we can produce every bit as much or more than an antiquated greedy powerhouse like OPEC. With the export ban lifted , this will create a new power vacuum that Arab countries are not prepared for. This in turn will create even more drilling and an oversupply that will change the entire economics of petroleum.

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