Feb 14, 2017 08:18 PM EST

Oil Supply Cut Addresses Oversupply Problems But Shale Drillers Hit Futures

Saudi Arabia, Kuwait and certain other countries have been following through on their promise to cut oil production, which should have alleviated the pressure on futures. However, the industry did not anticipate that shale drillers in the U.S. will ramp up production.

The Organization of Petroleum Exporting Countries and 11 other nations that supply oil have entered into an agreement to reduce production after oversupply negatively impacted several industries. The abundance of oil in the market led to lower oil price and falling oil futures, Bloomberg News reported.

The agreement would have made sure that the world will see an oil deficit. However, share drillers in the United States took advantage of the situation and increased drilling as crude prices rise.

Countries bound by the agreement to cut output have successfully done so, reducing production by 1.12 barrels in January alone. Those who are not governed by the agreement also lowered their output. However, countries that are exempted from the agreement are increasing their output.

Reuters reported that the rise in production in the United States is undermining the effort of the OPEC and certain suppliers to stem oil glut in the market. Facing such competition, suppliers may opt out of the agreement to reduce production and instead focus on increasing it.

Oversupply in the market could be viewed as a good thing especially by industries that are heavy users of oil. However, it could also cause suppliers problems because they might find it difficult to offload the oil, which could lead to global oil inventory builds.

There is no news yet about what the oil suppliers' plans are. Meanwhile, investors are eagerly waiting to see what they plan to do to address the looming issue.

Jobs & Hire previously reported that some of the top oil companies have promised to invest $1 billion to reduce leakages in methane.

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