OPEC’s Extension of Output Cuts Would Remain Beneficial for U.S. Steel

by Trefis Team
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The Organization of the Petroleum Exporting Countries (OPEC)’s decision to keep their production cuts intact through 2018 would continue to remain beneficial for U.S. oil producing companies. Extension of the oil supply cut would result in increased support for global oil prices and thus would lead to increased oil drilling activities in the U.S. This would remain as an upside for the tubular section of U.S. Steel which has already seen some degree of revival this year.

OPEC, along with its non-OPEC allies (including Russia, Kazakhstan, Oman, and Bahrain) has announced the extension of production cuts of 1.8 million barrels of oil per day (bpd) until the end of 2018. This move would continue to support global oil prices and, in turn, help improve the margins of U.S. oil producers. Most shale oil producers break-even at an average of $50 per barrel. [1] Dampening of oil prices since 2014 has discouraged oil drilling activities in the U.S. as most companies suffered significant losses due to lower prices. Oil has exhibited a recovery in its prices this year owing to the oil production cuts initiated by OPEC since January. [2] The extension of this production cut, would further support oil prices in 2018. Oil is expected to subside at a level of $60-65 per barrel in the upcoming year. This would provide U.S. shale oil producers a desirable opportunity to enhance their production levels.

The U.S. Tubular segment of U.S. Steel produces steel pipes (Oil Country Tubular Goods or OCTGs) used in oil and gas drilling, the demand for which is directly proportional to global crude oil prices. Thus, an increase in oil drilling activities in the U.S. would, in turn, lead to higher price realization and shipment volume for U.S. Steel. We expect revenues for U.S. Steel to recover significantly over our forecast period as depicted by the chart below.

You can view our base case for dividend yield for U.S. Steel here and create different scenarios using our interactive platform.

We have a $25 price estimate for U.S. Steel, which is below the market price.

Have more questions about U.S. Steel? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for U.S. Steel

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Notes:
  1. U.S. shale breakeven price revealed around $50: Kemp, Reuters []
  2. OPEC cuts help push oil prices to 2-year highs, Financial Times []
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