Crude oil prices are being pumped by OPEC's production cuts, but they are at risk of being knocked down by a gusher of new U.S. shale drilling. OPEC and non-OPEC producers, like Russia, agreed in December to take 1.8 million barrels of crude off the world market. As a result, they have kept the price of oil in the $50s per barrel even with a supply glut, most apparent in the United States. At the same time, U.S. drillers, emboldened by the higher oil price, are drilling at the highest rate in more than a year and look on track to go back to record levels by year-end. All of these principals — the Saudis, other Gulf producers, Russians, Brazilians, Mexicans, big oil and U.S. shale drillers — will meet in Houston starting Monday, Mar. 6, on panels, at dinners and in the hallways of the annual CERAWeek by IHS Markit energy conference. The question now is who will blink first?

Russia's Energy Minister Alexander Novak (L) and Saudi Arabia's Energy Minister Khalid al-Falih. Heinz-Peter Bader | Reuters

OPEC meets again in May and will consider whether to extend the deal. Then there's Russia, the world's largest energy producer, which has certainly been helped by price stability but is still feeling the pain wrought by crashing prices. There's also the U.S. shale industry. It's no longer a bunch of upstarts, but a cadre of the world's largest integrated oil producers alongside independent drillers, all eyeing unconventional drilling as a way to get quicker returns with lower costs on shorter horizon projects. The industry also has new vigor, with President Donald Trump setting a pro-hydrocarbon agenda from the White House, encouraging more drilling and construction of energy infrastructure, including the controversial Keystone and Dakota Access pipelines.

Dealing with a US hydrocarbon bounty

One of the hottest stories this year is the bounty of the Permian Basin, which runs beneath Texas and New Mexico and offers a new prosperity to the likes of even an Exxon Mobil, which can profit with $40 oil because of technological drilling advances pioneered by the U.S. industry. "This is the push/pull of the market," said Helima Croft, head of global commodities strategy at RBC Capital Markets. "I think OPEC is hoping that this remains largely a Permian story. ... That a lot of the cost deflation we saw will rise as prices rise. Service companies will again charge more. There's a sort of uncertain equilibrium they have to deal with in U.S. production. They hope it will remain largely Permian, but it could get away from them and require deeper cuts. I don't think the problem is compliance within OPEC, because the Saudis will do what it takes." Russian Energy Minister Alexander Novak speaks Monday, and Saudi Arabia energy minister Khalid Al-Falih participates Tuesday. "That was a key relationship for the dialogue they made for this OPEC, non-OPEC agreement, which really hasn't happened before, and the compliance is higher than it's been in the past," said Daniel Yergin, vice chairman of IHS Markit. "I think they're committed to this deal, and that's one of the main things they want to convey," Yergin said. Analysts say the real issue is what Saudi Arabia and Russia say about future enforcement and whether they are ready to embrace extension of the six-month production deal in the face of new output from the United States.

Certainly, the Permian and unconventional play brings a new dimension to the marketplace, and it's just a question of how OPEC intends to respond to that. Darren Woods Exxon Mobil chairman and CEO

Saudi Arabia has been shouldering the largest portion of cuts. As the world's biggest exporter, it is the key driver of OPEC policy, and it's not clear how much pressure it will take on prices if the United States continues to up production. The United States, in fact, has been producing 9 million barrels a day recently. It has had a number of days this winter where it was exporting record levels of oil, at more than 1 million barrels a day. Some analysts see a collision coming between shale and OPEC if the U.S. industry puts enough oil on the market to push the price below $50. Exxon Mobil chairman and CEO Darren Woods told CNBC this week that OPEC has the lever of low costs, while the unconventional drilling business is driven by economics and market prices. OPEC turned to the new production-driven strategy after a failed plan to let the market set prices. That resulted in oil collapsing into the $20s per barrel after Russia and members of the OPEC kept pumping at record levels. "Well, you've seen OPEC make a difference in the market here in the short term. Certainly, the Permian and unconventional play brings a new dimension to the marketplace, and it's just a question of how OPEC intends to respond to that," Woods recently told CNBC. "You saw earlier on, their response was to continue to keep production up. The market got oversupplied. Prices came down. They've now backed off of that. You see unconventionals coming back up again. I think … the market is still in a bit of discovery, trying to understand how that conventional play fits in with more of the traditional dynamics," Woods said. Woods speaks at CERAWeek on Monday. Yergin said an issue for the U.S. industry is how long the price of drilling services will remain low, a big factor in helping drilling ramp up after prices and activity fell sharply.