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A False Sense of Security for U.S. Oil Producers?

As OPEC keeps prices propped up, producers will have more incentive to add rigs, which could mean oversupply in 2018.

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Dave Meats: In November 2016, OPEC announced that it would cut production by 1.2 million barrels a day for the first six months of the current year. Since then, oil fundamentals have improved significantly and prices have risen by about 17%. Our concern is that this creates a false sense of security for U.S. producers, which are accelerating operations to capitalize on these higher prices.

The number of tight oil rigs has already doubled from the May 2016 trough. That hasn't had much impact on production yet, but remember, it takes six months to bring a well online after starting to drill it. So the volumes generated by ramping shale activity won't find their way to market until the middle of the year. After that, production could grow quite quickly.

Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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