OPEC Keeps Focus on Shale Threat as Officials Meet in Vienna

  • Delegates meet to discuss state of international oil market
  • IHS, Mark Papa give presentations on U.S. oil industry

Saudis Confident in Extension of Oil Cuts for 9 Months

OPEC officials gathering in Vienna on Friday to prepare for next week’s ministerial meeting kept their focus on rising U.S. shale oil production, which has been diluting the price impact of their production cuts.

National representatives from the Organization of Petroleum Exporting Countries and officials from several non-members heard a presentation on the outlook for the U.S. industry from Roger Diwan, a Washington-based analyst at IHS Markit Ltd., according to delegates familiar with the matter. Mark Papa, a partner at private equity firm Riverstone Holdings LLC and former boss of shale pioneer EOG Resources Inc., also spoke to the group, delegates said.

Officials at the meeting were relieved that the two outside consultants had estimates for growth in average U.S. crude output of 450,000 to 500,000 barrels a day this year, lower than the 562,000 barrel-a-day forecast from OPEC’s own analysts, said two delegates.

The emphasis on U.S. production underscores the dilemma for OPEC and its allies as they consider whether to extend their cuts beyond June. The producers, who together account for about half the world’s oil supply, have seen the initial price boost from their historic agreement fade as shale companies deployed more rigs and raised the country’s output to the highest since 2015. That recovery could accelerate if they decide on May 25 to prolong the curbs.

IHS’s Diwan presented an estimate that U.S. output this year will be about 500,000 barrels a day higher on average than in 2016, the delegates said, asking not to be identified because the meeting was private. That still means that production at the end of 2017 will be 700,000 to 1 million barrels a day higher than at the start, the delegates said.

That compares with a supply reduction of 1.2 million barrels a day from October levels implemented by OPEC, plus a cut of less than 400,000 barrels a day from non-members.

Papa, who helped create the shale industry more than a decade ago, estimated that average U.S. output would be 450,000 barrels a day higher this year, the delegates said.

Three Choices

OPEC is widely expected to prolong its supply curbs, and all producers are backing a nine-month extension, Saudi Arabia Oil Minister Khalid Al-Falih said Saturday.

“We think we have everybody on board,” Al-Falih said in an interview with Bloomberg television in Riyadh. “Everybody I’ve talked to indicated that nine months was a wise decision.”

OPEC’s Economic Commission Board, a panel of representatives from member countries that meets to discuss the market before every ministerial meeting, considered the implications of various scenarios including extended production cuts, deeper supply reductions and the expiry of the curbs in June, the delegates said. Officials in Vienna didn’t recommend a specific course of action, the delegates said.

Out of these three choices, an extension is most likely, analysts from Bank of America Merrill Lynch said in a note to clients.

“If OPEC cuts production even more, it will likely lose additional market share to U.S. shale and prices may not move up much more,” the bank said. “Conversely, if OPEC hikes output, oil prices could collapse to $35 a barrel, setting the cartel on an even more difficult fiscal path. In our view, most OPEC members cannot afford either scenario at this point.”

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