Nigeria Hints of Impending OPEC/U.S. Shale Clash as Analyst Declares Consumers to be the Real Winners of the Rivalry

Wednesday June 7, 2017

With U.S. oil output expected to reach 10 million barrels per day (bpd) next year and the Organization of the Petroleum Exporting Countries (OPEC) vowing not to let American producers undermine its crude cutbacks efforts, analysts are likening the rivalry between the two parties to the squabbles between Amazon and Walmart: both are the same in that the consumer is clearly the winner.

Writing in Forbes, Tim Worstall, a Fellow at the Adam Smith Institute, states, "The flexibility of shale is such that my bet is on that to win, but that's pretty much an irrelevance as compared to the real winners, us consumers."

Worstall goes on to draw the comparison between the crude producers and the retail giants, noting that "Their concentration upon low prices - driven by their logistics efficiency - means that everyone else also has to offer better prices ... the importance is that the consumers benefit from the competition far more than anyone else in the equation and it is the very competition itself which leads to the consumer gains."

Worstall's view coincides with the U.S. Department of Energy disclosing on Tuesday that it believes American oil production will rise to 10 million bpd next year, beating the previous record of 9.6 million bpd set in 1970.

Howard Gruenspecht, acting administrator for the department's Energy Information Administration, pointed out that "Increased drilling activity in U.S. tight oil basins, especially those located in Texas, is the main contributor to oil production growth, as the total number of active rigs drilling for oil in the United States has more than doubled over the past 12 months."

For the record, the EIA also believes shale producers will have to withstand smaller profits in 2018: it forecasts West Texas Intermediate averaging $53.61 per barrel next year, down from last month's forecast of $55.10.

While shale producers presumably are prepared for thinner margins, critics such as Sandy Fielden, director for oil and products research at Morningstar, are worried about the bigger picture: "The market's concern with increased shale production is that as it outpaces domestic U.S. demand, any excess crude could build inventory and undermine the OPEC market-balancing narrative," she said.

But as far as Emmanuel Ibe Kachikwu, petroleum minister for Nigeria, is concerned, OPEC will not allow shale to "sabotage" the cartel's production cut agreement now extended by nine months: "If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do," he said.

Kachikwu's vague warning that a fight might be in the offing is somewhat ironic considering Nigeria is one of several OPEC members that have vowed to boost, not reduce, production in the near term.

Moreover, the consensus of oil experts is that OPEC's troubled cutbacks are doomed to failure regardless of shale's impact, mainly because the cartel did not deepen it cuts when it agreed to extend them.

The Financial Post summarized OPEC's gambit as a failure last month by stating that its initial strategy to increase growth and quash U.S. shale "was a risky, hard gamble, not for the feint of heart, and victory was far from assured...today OPEC looks like it's playing to neither win nor lose; the game is over."