Commodities

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

OPEC and its friends have just received some uncomfortable reading. The latest forecasts from the U.S. Energy Information Administration suggest that their agreements to boost prices and hasten the rebalancing of oil supply and demand by cutting output may bring the U.S. shale industry out of hibernation faster than they might like.

The EIA's monthly report published on Tuesday raised its forecast of global oil demand growth for 2017 to 1.63 million barrels a day from last month's 1.56 million, its third successive increase -- that should be good news for producers. At the same time, though, the EIA boosted its outlook for U.S. oil production.

Demand Growth Strengthening
The EIA has been getting more bullish in its forecasts of global oil demand growth for 2017
Source: Department of Energy
NOTE: X-axis shows date of forecast for year-on-year global oil demand growth in 2017 versus 2016

This is where the news gets bad for OPEC. Separate weekly EIA data published on Wednesday showed a 176,000 barrel-a-day jump in U.S. production from the previous week, the biggest increase since May 2015. A large part of that increase came from a revision of fourth-quarter output figures, with U.S. production raised by 100,000 barrels a day from the previous estimate -- this isn't an example of shale responding quickly to higher prices. 

Steps to Recovery
The recovery in U.S. oil production began to accelerate in the final quarter of 2016
Source: Department of Energy

Why is this important? Because it means that U.S. oil production was already growing more strongly (due to increased drilling rates) than thought at a time when the consensus view was that OPEC would fail to agree to cuts and that oil prices would struggle to rise above $50 per barrel this year. These suppositions were undermined on Nov. 30, when the group agreed to cut output by around 1.2 million barrels a day, followed in early December by pledges from 11 non-OPEC countries to contribute a further 560,000 barrels of cuts. 

Revising the Future
The recovery in U.S. oil production just got a lot faster in the latest short-term outlook
Source: Department of Energy

The EIA now sees U.S. production reaching 9.22 million barrels a day by December, an increase of 320,000 barrels over the year. But this could quickly start to look like a conservative forecast.

The incoming U.S. president and Congress may turn out to be more supportive of oil extraction than the outgoing ones, after Donald Trump said in September that he would "lift the restrictions on American energy and allow this wealth to pour into our communities." This could give the shale sector a further boost.

Shale's Reawakening
U.S. oil production is growing again as shale comes out of hibernation faster than OPEC may have hoped
Source: Department of Energy

Given that we now know that U.S. output was rising at a rate of 50,000 barrels a day each month in the last quarter of 2016, the warming price environment created by the OPEC deal and the benign impact of reduced regulation have set the stage for signs of life in shale to gather pace. And if prices go further above $55, that could provide further impetus to its return. 

It was always going to be a matter of when and not if OPEC would have to start grappling with the return of shale, and it looks like that time had already come even before it started supporting oil prices again. The big question is to what degree will the group and its members comply with what they said they'll do, and how much extra boost that will give to the U.S. shale oil industry.

OPEC is already talking of extending the time frame for its output cuts when it meets in May. It may also have to consider deepening them if it's serious about balancing supply and demand. The problem it faces is that doing so will simply improve the outlook for shale. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net