Report of "Explosive" U.S. Growth Triggers More Squabbling Over How OPEC Will React

Friday January 19, 2018

Friday's release of the latest International Energy Agency report forecasting "explosive" U.S. oil output that will overtake Russian and Saudi Arabian production triggered more worries of the Organization of the Petroleum Exporting Countries (OPEC) ending its crude cutback strategy early in order to discourage the growth.

And, as usual, an equal number of experts countered that the crude rally currently galvanizing the Americans will not prompt OPEC to do anything but maintain course.

Amid the morass of mixed messages, only one thing is certain: "This year promises to be a record-setting one for the U.S.," according to the IEA.

The agency in its report reiterated what everyone either intimately or remotely acquainted with the energy industry knows already: that American oil production, which has already risen to its highest level in nearly 50 years, will push past 10 million barrels per day (bpd) in 2018 thanks to higher prices encouraging more producers to start pumping.

The IEA also declared that "a wave of new production" from the U.S. is forthcoming and that this plus  "substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico."

But even though Friday's market showing of more losses for crude suggested that the price rally causing analysts so much worry may soon end, it didn't prevent them from envisioning OPEC's premature exit from its cutbacks: Harry Tchilinguirian, head of commodity strategy for BNP Paribas SA, said "the probability is growing" that a termination will occur before the end of this year.

He pointed out that "If Brent is still trading around $60 a barrel and oil inventories are close enough to OPEC's five-year average," the deal may be phased out via nations gradually weakening their cutback compliance.

Bjarne Schieldrop, chief commodity analyst at SEB AB, as well as Giovanni Staunovo, commodity analyst at UBS Group AG, suggested the accord will be modified so the cuts will gradually unwind from mid-2018.

In stark contrast to these sentiments was the argument from Richard Mallinson, geopolitical analyst at Energy Aspects, that "We will see compliance drop in the second half of the year (so) they are going to want to really cement the gains they have made and the rebalancing they have achieved."

Mallinson also thought analysts are mistaken in thinking OPEC's only options are to either stick with the current level of supply cuts or to allow flat-out global production.

If the U.S. is the chief victor of the energy industry in 2018, it is followed closely by Saudi Arabia, which has persistently called for high crude prices because it will add value to its initial public offering of Saudi Aramco; and as pundits tousled over what will happen to the market next, Amin Nasser, chief executive officer for the state-owned company, announced that it will be ready for the IPO in the second half of this year.

He said, "We can list at home and abroad at the same time but it's not our decision. We are waiting for the government to tell us where to list so that we prepare for the venue."

Mallinson's stance is closely aligned with many OPEC members, including the United Arab Emirates, Kuwait, and Iraq, as well as non-member Russia, all of whom have stated that rampant U.S. production notwithstanding, the cartel is making real headway in rebalancing the market but needs more time to complete the task.