Rising US shale production puts Opec in a tight spot

Rising US shale output, resumption of production from two major Libyan oil fields and the European Central Bank’s decision to leave interest rates at zero per cent are nudging the US dollar higher, making the job of the Organisation of Petroleum Exporting Countries (Opec) tougher and still tougher.

The US crude output has gone up 10pc since mid-2016, standing at 9.27 million barrels per day (bpd), the Energy Information Administration (EIA) reported. The energy equation weakened further by the large buildup in gasoline inventory in the US last week, despite heading towards the peak summer driving season.

All this was despite the fact markets have been finding support from news that major Opec and non-Opec oil exporters were closing in on the extension of the crude output cut deal for an additional six months. “There seems to be a consensus in that direction, but we’re not 100pc there,” the Saudi Energy Minister Khalid Al-Falih conceded, after meeting Azeri Energy Minister Natiq Aliyev in Baku, Azerbaijan.

“We still need to talk to all countries. A very important country to talk to, of course, is Russia, the biggest non-Opec exporter” said Mr Al-Falih who is scheduled to meet his Russian counterpart Alexander Novak in Vienna on May 25.

“Saudi Arabia and Russia will try to develop a decision that everybody has to support. If the oil market doesn’t balance by June, all of us will be pragmatic enough to do the right thing,” said Mr Al-Falih.

But, what if producers’ don’t agree to extend the output cut? “If Opec and the coalition don’t extend the agreement to continue cuts, that price floor will go. Without it, prices would fall, and there’s nothing to stop oil going below $40 a barrel,” said Christof Ruehl, head of research at Abu Dhabi Investment Authority and formerly BP chief economist at a conference in Dubai on Wednesday.

“The market is looking for a direction right now and ending the production cuts would be negative for oil prices,” Edward Bell of Emirates NBD PJSC was quoted as saying. “Without a deal, oil could certainly be pushed below $40.”

“A drop to $40 a barrel is ‘a clear option’ should Opec not agree to extend cuts next month,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt.

Robin Mills, of the Dubai-based consultancy Qamar Energy, also agrees with the notion that prices would fall to as low as about $40 a barrel without an extension.

But the output cut deal is extracting a price of its own too. One consequence of the cuts for Opec is that Iraq and Iran are gaining market share at the expense of Saudi Arabia. “If you’re talking about winners, you can count Iran and Iraq,” Mr Ruehl said at the conference.

Saudi Arabia, the Opec’s biggest producer, agreed to cut output by 486,000 barrels a day. Iran has boosted production in part due to the end of sanctions restricting its oil sales in January 2016, while Saudi Arabia has made more than its share of output cuts, Mr Ruehl emphasised. Neighbouring Iraq pumped 4.43m bpd in March, down 200,000 barrels for the year, and not 210,000 bpd as was committed, Bloomberg data indicated.

“The Saudis are losing out because other countries are able to squeeze out more production, in order to hold on to its share, Saudi Arabia is cutting crude pricing to Asia,” Mr Bell pointed out.

The issue of market share is getting into focus, once again. Iran and Iraq increased crude sales to China last month, while Saudi Arabia slipped behind Russia and Angola, data released by the Chinese General Administration of Customs reported.

The issue of rapid increase in shale output is also coming into the overall picture. Oil and gas consultancy, Rystad Energy expects US shale oil output to grow by 100,000 bpd each month for the rest of this year and into 2018 if oil prices hold around $50-$55 a barrel, well above estimates by the US EIA for monthly gains of about 29,000 bpd in 2017 and 57,000 bpd in 2018.

In order to meet their budgetary requirements, producers’ need the markets to strengthen. Cutting oil markets could definitely help this cause. Yet, they are faced with a dilemma too. Weakened markets, on the other end, could help deflate the momentum of US shale.

Oil producers’ are faced with a real dilemma. Before reaching a conclusion, a whole bunch of variables needs to be taken into account, the growing shale output being only one of them.