Nigeria Recovery, Further U.S. Shale Expansion Possible Even as OPEC Considers Cutback Extensions

Nigeria says it will join in the cartel's cuts – but not before ramping up production to 2.2 million barrels per day.

It seems that for every small victory achieved by participants of the Organization of the Petroleum Exporting Countries (OPEC) oil production cuts there is a setback or at least the threat of one, and last week's hitch came courtesy of Nigeria, which will resume its goal of producing 2.2 million barrels per day (bpd) even as OPEC debates extending its cuts to help alleviate the global glut.

Emmanuel Ibe Kachikwu said last week that his country, which had been exempt from the cutbacks due to militant attacks causing production to slow to 250,000 barrels in March, will participate in the cutbacks once it has fully restored the output it has lost.

Kachikwu added that not only does he think Nigeria could recover as early as October or November, he expects the cartel to extend its cuts in order to keep prices above $50 per barrel: "I'm not sure we have an alternative - we've got to.

"There's a lot of energy around a six-month extension," which should be "easy" to agree when ministers meet in May.

More potential trouble for OPEC is a further acceleration of U.S. shale production, which pundits think may well occur in the wake of JPMorgan Chase & Co., Wells Fargo & Co., and Citigroup Inc. on Thursday stating in their first-quarter earnings results that rising oil prices have helped them free a combined $370 million they previously set aside to cover bad loans.

Bloomberg notes that in the first quarter of this year, U.S. energy companies raised $26.8 billion in leveraged loans, up roughly 86 percent from the same period last year; and according to a Haynes & Boone survey earlier this month, 76 percent of respondents said they expect credit lines to stay steady or grow, and 89 percent predicted U.S. shale drillers will spend more in 2017.

Kraig Grahmann, a partner at Haynes & Boone, said, "With low cost of capital loans, there will be more programs for oil producers that will get them the desired rate of return.

"Companies will be able to drill more oil and gas wells, which will increase production and thus increase U.S. supply."

But Spencer Cutter, U.S. Credit Bloomberg Intelligence Analyst, sounded a mild note of caution: "Big banks will be more selective when choosing who to extend loans and will increase lending to better producers."

Still, the developments strongly suggest that it's full speed ahead for production on multiple fronts, and this comes on the heels of the International Energy Agency (IEA) earlier this week indicating that global oil stocks were likely to have "marginally increased" in 1Q 2017; the IEA attributed the gains to surging output just before the oil cut deal came into play.