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US shale producers see Opec pullback helping 2019 profits

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US shale producers cheered The Organization of the Petroleum Exporting Countries (Opec's) decision to trim output, a move that sent crude prices higher on Friday, closing at levels that oil executives said would keep their profits flowing.

[HOUSTON] US shale producers cheered The Organization of the Petroleum Exporting Countries (Opec's) decision to trim output, a move that sent crude prices higher on Friday, closing at levels that oil executives said would keep their profits flowing.

Opec and Russia-led allies agreed to trim output by 1.2 million barrels per day (bpd) beginning in January. The reduction was larger than the one million bpd cut that analysts had expected.

US oil futures settled up nearly 2 per cent at US$52.61 on Friday after trading as much as 4.5 per cent higher during the day. Prices peaked at above US$76 in early October but had plummeted to about US$50 ahead of this week's Opec meeting.

"As long as a little producer like me can expect US$50 or better, we can do fine; US$50 works for me," said Harvey Howell, president of H H Howell, a San Antonio, Texas, producer.

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Halting the steady decline toward US$40s a barrel range provides confidence that US companies can profitably expand drilling next year. On Thursday, oil major Chevron Corp set a 2019 capital spending budget that includes a 21 per cent increase in spending on shale.

Without Opec's decision to pull back, "we were going to see oil in the US$40s," said Steven Pruett, chief executive of shale producer Elevation Resources. He called the move a "relief" that Opec and allies were able to agree to the coordinated cuts.

"It's good for us. It keeps the capital flowing," said George Wommack, CEO of Petro Waste Environmental LP, the largest oil and gas landfill operator in the Permian Basin of West Texas and New Mexico. He said service companies "have all been on the edge of our seat watching Opec."

Shale investors have been pushing companies to generate higher profits instead of increasing production, and a further drop in oil prices would have slashed cash flow needed to cover production costs and deliver shareholder payouts.

"What investors want to see is discipline in a low commodity price environment," said Sameer Panjwani, an exploration and production analyst at Houston investment firm Tudor, Pickering, Holt & Co.

Energy stocks have suffered this year. A fund that tracks energy firms, the SPDR S&P Oil & Gas Exploration & Production ETF, is down 14.5 per cent year to date and was flat on Friday.

Oil prices between US$55 to US$65 per barrel are a "sweet spot for the US producer and the US consumer," said Rob Thummel, portfolio manager at energy investment manager Tortoise Capital.

"We think stable oil prices are the key to bringing investors back to the energy sector," Mr Thummel said.

REUTERS