US shale output set to rise even as Opec cuts supply

New York

US shale is getting in the way of a New Year's resolution by Opec to cut production and boost the market.

Producers and merchants increased their bets on lower West Texas Intermediate crude prices to the highest level since 2007 as futures held above US$50 a barrel. The increase in hedging against a price drop signals a comeback in US shale output, just as Opec members and other producers seek to reduce supply.

The Organization of Petroleum Exporting Countries reached an agreement in November to cut production by 1.2 million barrels a day for six months starting in January, and were joined by 11 non-Opec nations in an effort to reduce a global glut. The Energy Information Administration last week raised its forecast for 2017 US crude production. A Barclays Plc survey showed North American oil and gas explorers will spend 27 per cent more this year.

"It may not all be physical above-the-ground inventory that is being hedged, but it may be a portion of 2017 and 2018 planned production," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said on Friday. "Certainly, if there was strong conviction that oil prices are heading for US$70, then producers would be less inclined to sell at current levels."

Producers and merchants increased their short positions, or bets on lower prices, to 675,968 futures and options in the week ended Jan 10, US Commodity Futures Trading Commission data show. WTI fell 2.9 per cent to US$50.82 a barrel during the report week.

The US oil rig count increased in 10 out of the past 11 weeks, according to Baker Hughes Inc data. The EIA also reported that US crude output rose to the highest level since April in the week ended Jan 6, while crude stockpiles surged by the most since November.

Saudi Arabia, the world's biggest oil exporter, has reduced production to less than 10 million barrels a day, below its targeted level, Energy Minister Khalid al-Falih said on Thursday. Algeria also will curb output by more than it agreed, while Iraq hopes to meet its full cut by the end of the month.

Oil producers will adopt compliance mechanisms at a meeting in Vienna on Jan 22, Opec secretary-general Mohammad Barkindo said on Friday. Members will also meet in the city in May to assess the market and decide whether the group, as well as non-Opec producers, needs to extend the agreement to curb production, he said.

Higher production from countries outside Opec's deal will complicate the organisation's task. US oil output will grow by 110,000 barrels a day this year and will be higher on an annual basis by April, the EIA said in its Short-Term Energy Outlook on Jan 10. One Opec producer exempt from the deal, Libya, has increased output to 700,000 barrels a day, a National Oil Corp official said earlier this month.

Producers are "protecting themselves", Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, said on Friday. "The production increase from the US, coupled with Libya's increases, is really going to hit the market going forward." BLOOMBERG

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