OPEC’s cheer over 2018 oil rally tinged by shale worries

Dubai / Reuters

Oil’s price rally this year to its highest since May 2015 may seem a source of glee for OPEC, but some in the producer group fear the gains could prompt shale companies to crank
open their spigots and flood the market.
Benchmark Brent crude rose further above $68 a barrel, supported by oil output cuts led by the Organization of the Petroleum Exporting Countries and allies including Russia that are due to run until the end of 2018.
The surge comes as a welcome boost for the revenues of oil-producing nations, many still reeling from a price collapse that started in mid-2014 when crude began to fall steeply from above $100 per barrel due to oversupply.
Some in OPEC are worried a prolonged rally could stimulate more US shale oil output, however, creating more oversupply that could weigh on prices and market share. “We all are excited about the rally and want to see if it will be sustainable during the year, as it will certainly whet the appetite of shale producers,” an official from an OPEC country said. The oil minister of Iran, OPEC’s third-largest producer, said that the organisation’s members were not keen on increased prices as such gains would encourage more shale production.
OPEC has no formal target for oil prices. However, Saudi Arabia, OPEC’s top producer, wants to see crude above $60 to boost the valuation of its national oil company Aramco before an initial public offering of shares this year and to reduce the gap in its state budget, Saudi sources have said. OPEC sources say Saudi Arabia has become a strong advocate of higher prices, a shift from a more moderate stance in the past, and Saudi officials have downplayed the threat of a boost in shale production.
Even so, US production is expected soon to rise above 10 million barrels per day, close to Saudi levels, due largely to soaring output from shale drillers, government data shows. OPEC officials also think the 2018 rally has been mainly driven by unrest in Iran, rather than a tighter balance between supply and demand, giving rise to concern it may not last.
“Oil prices rose because of the political situation in Iran,” an OPEC source said. “There is a worry now that this would be followed by a sharp decline in prices.” A third OPEC source said market fundamentals did not justify the price rally.
While OPEC sources say oil market fundamentals remain strong on the back of the supply cuts, others are worried that economic growth in consuming countries could slow and higher prices might encourage some producers to pump above their output target.

Oil rises from a 3-year high
Bloomberg

Oil extended gains from the highest close in more than three years as US industry data signaled crude stockpiles dropped an eighth week.
Futures climbed as much as 1 percent in New York after rising 2.5 percent the previous two sessions. US crude inventories fell by 11.2 million barrels last week, the American Petroleum Institute was said to report. If the draw is replicated in Energy Information Administration data, it would be the biggest decline for this time of the year since 1999.
Oil is continuing its advance after a second annual gain as the Organization of Petroleum Exporting Countries and its allies trim supply to drain a global glut. The group is facing the challenge of rising US crude output, which the EIA expects to rise above 10 million barrels a day as soon as next month, eventually topping 11 million in November 2019.
“It’s not completely unexpected given the price momentum,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said of oil’s latest gains. But “the shale rebound is also for real” and there’s a risk of a “massive price slump.”
West Texas Intermediate for February delivery rose as much as 61 cents to $63.57 a barrel on the New York Mercantile Exchange, and was at $63.42 at 10:19 a.m. in London. Total volume traded was about 27 percent above the 100-day average. Prices advanced $1.23 to $62.96, the highest close since December 2014.
Brent for March settlement climbed as much as 44 cents, or 0.6 percent, to $69.26 a barrel on the London-based ICE Futures Europe exchange after
advancing 1.5 percent to the highest since December 2014.