Russia Warns of New Price War Due to U.S. Shale Gains as Kuwait Calls for Extension of OPEC Production Cuts

Tuesday March 14, 2017

Russia, which is said to be planning to boost oil production this year after the expiry of the Organization of the Petroleum Exporting Countries (OPEC) output reduction agreement, said the recovery of U.S. shale producers is endangering the prospects of extending the agreement and could lead to a new price war.

In a written response to Reuters, Rosneft stated, "It became evident that U.S. shale oil output has become and will remain a new global oil price regulator for the foreseeable future.

"There are significant risks the (OPEC-led) deal won't be extended partially because of the main participants, but also because of the output dynamics in the United States, which will not want to join any deals in the foreseeable future."

Rosneft went on to speculate that "We think that in the long-term global oil demand dynamics and reduced investment during the period of ultra low prices will balance the market, but that the risk of a price war resuming remains."

Rosneft noted the only guaranteed way to balance the market is for all producers to limit supplies - even though Russia itself has yet to make good on its pledged cuts.

With the Americans increasingly being viewed as the sole heavies of an initiative that despite reports of 98 percent compliance has seen substantial output increases from the likes of Iran and Iraq, Kuwait has become the first OPEC nation to officially call for an extended reduction agreement.

Issam Almarzooq, oil minister for Kuwait, told the Kuna news agency that U.S. inventories have climbed more than expected, causing prices to decline: "Kuwait supports the extension of the agreement after June," he said, adding that an extension will ''accelerate the rebalancing of the global oil market and will contribute to the return of prices to levels acceptable for producing countries and for the petroleum industry in general."

Almarzooq conceded that reducing a 280 million barrel inventory "within one or two months isn't easy, but I am certain and fully confident that the commitment of all the countries with this agreement will bear fruit in the next few months."

Less interested in rhetoric and more concerned with brutal truth is John Kilduff, founding partner of Again Capital, who in an editorial to CNBC suggested that an extension is unlikely due to Saudi Arabia, whose "patience has been tried, and they have come to realize that their efforts have only served to resuscitate the U.S. shale competition, which is increasingly taking the battle for global market share to OPEC."

Kilduff is arguably the only analyst to explicitly state that "if you take out [the Saudis'] over-compliance, the OPEC compliance rate with the cutbacks is under 50 percent"; he reminded readers that the Saudis have repeatedly stated of late that they won't abide by "free riders," and that they could well walk away from the cutback agreement.

He concluded, "While it is painful to all concerned to undertake a price war, you can bet the lowest cost producers will be the last ones standing."

Last year it was disclosed that Rosneft, private Lukoil, private producer Surgut, state-owned GazpromNeft, and Tatneft will collectively raise production by around 1.6 percent on average in 2017, while other sources believe production will reach record levels after the expiry of the OPEC agreement.