The Strategist

Oil production increase in the US can limit oil prices

03/09/2017 - 14:00

OPEC countries and other oil exporters, which signed the oil freeze agreement, are now discussing a possibility of extending the deal and involve companies from the United States. At the same time, the agreement’s key player, Saudi Arabia, hints that oil suppliers outside the cartel, in particular, Russia, are making insufficient efforts to comply with the agreement. Meanwhile, the IEA is predicting that shale mining in the United States will accelerate soon. This could become a more significant factor for oil prices than the current production constraint.

Oil production increase in the US can limit oil prices
OPEC and North American oil shale oil producers agreed to continue their dialogue on stabilizing the international oil market, said the Cartel’s Secretary Mohammed Barkindo at CERAWeek energy conference in Houston. According to him, some US companies confirmed their participation in a meeting of the OPEC working group and the International Energy Agency (IEA) in Vienna next week. Mr. Barkindo acknowledged that American producers are primarily interested in whether the oil freeze will be prolonged.

Recall that since January, OPEC and some oil exporters have limited production for half a year: the cartel - by 1.2 million barrels per day (up to 32.5 million everyday), countries outside the cartel - by 558 thousand barrels per day (including the Russian Federation with 300 thousand barrels). According to the IEA, OPEC is fulfilling its obligations under the agreement by 90%. Saudi Arabia cut production even more than it was required. Now, Riyadh is warning that the agreement will not be prolonged in May if other participants keep shying away from the reached agreements. According to Khalid A. Al-Falih, Minister of Energy of this country, Russia is cutting production "more slowly than it could do". He said that Russian Energy Minister Alexander Novak promised to additionally reduce production during the first week of March by 40 thousand barrels per day (the production has been cut by 160 thousand barrels per day since the beginning of the year). Previously, Mr. Nowak said that Russia would reach the figure of 300 thousand barrels per day by the end of April. 

However, production constraints may not be sufficient to support oil prices. The US Energy Information Agency (EIA) forecasts that production in the US will grow from 8.9 million barrels per day in 2016 to 9.2 million in 2017, and to 9.7 million in 2018. At that, average price of a barrel of Brent will be $ 55 in 2017 and $ 57 in 2018. The agency expects that the oil market in the next two years will be "relatively balanced", noting that its global reserves fell by about 1 million barrels per day in February. At the same time, Fitch warns that increase in shale production in the second half of the year will prevent prices from rising and they may be lower ($ 52.5 per barrel) for the whole year than at the beginning. 

At the same time, five-year forecast of the International Energy Agency points to the risks of oil shortage, if investments in new projects are not approved in the near future. It is noted that only shale mining has been invested sufficiently so far. As a result, it could grow by 1.4 million barrels per day in five years at a price of about $ 60 per barrel. Price of about $ 80 per barrel would push the production by 3 million barrels per day. Among the OPEC countries, production growth is expected in Iraq, Iran, the United Arab Emirates, while it will decrease in Nigeria, Algeria and Venezuela. In Russia, production will remain at a stable level, the IEA expects.