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Why global oil production looks set to grow in 2018, despite OPEC-led output cut

Global crude-oil production looks set to rise next year, and
not just because of growing U.S. output.

Less than two weeks after the Organization of the Petroleum
Exporting Countries reached an agreement with some non-OPEC oil
producers to extend oil production cuts through March 2018,
compliance with the pact, and maybe even the agreement itself,
appears to be tenuous.

Russia has voiced concerns about loss of market share in oil to
the U.S., and President Donald Trump’s decision to pull out of
the Paris climate agreement could help ease restrictions on the
fossil fuel sector, potentially contributing to more oil
production.

Contributing to concerns, three Persian Gulf countries on
Monday dissolved diplomatic ties with Qatar.

All of that has helped to rattle confidence in the output-cut
pact, which has so far failed to lift

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 year to date—and traders are already worried about what
happens when the deal expires.

“There is definitely some very forward speculation going on
regarding what will happen when the OPEC deal is done, but also
that the deal may not be nearly as effective as [OPEC/non-OPEC] leadership is hoping,” said Tyler Richey, co-editor of the
Sevens Report.

U.S. output growth and Russia talk

One key factor feeding doubts over the output-cut agreement has
been that production in the U.S., which isn’t part of the pact,
is threatening to reach a record level next year.

Read U.S. oil output could hit a record level this
year: Rystad Energy

“Every barrel of market share that overseas producers actively
forfeit to the U.S. increases the odds that those participating
in the agreement will begin to cheat on their individual
quotas, which is obviously bearish from a supply standpoint,”
said Richey.

Host
Photo Agency/RIA Novosti via Getty Images


Rosneft CEO Igor Sechin

Igor Sechin, chief executive officer of Russia’s largest oil
company, Rosneft, voiced concerns related to that over the
weekend.

In an interview with the Financial Times over the weekend,
Sechin said his company was monitoring output from U.S. shale
producers and would raise production if there was a sudden end
to the production curbs.

“At this stage, our interests, the interests of Saudi Arabia
and the interests of the American shale industry, are aligned,”
Sechin told the Financial Times.
“But I assume that at some point in time, after some time,
these interests will diverge. And we will respond to that.”

In a note Monday, analysts at JBC Energy said they were
somewhat surprised to hear these statements right after the
OPEC/non-OPEC meeting in late May, given that there is a
“decent chance that a series of stock draws, such as the one
seen in last week’s [U.S. Energy Information Administration] data, could help to at least temporarily lift prices higher.”

The EIA reported an eight-straight weekly drop in U.S. crude
inventories
for the week ended May 26.

Still, the JBC Energy analysts also questioned whether it is
really a surprise to see prices trading lower, “with more and
more market participants seemingly increasing their focus on
the time” after the output-cut deal is done at the end of
March.

Qatar and the Middle East

Meanwhile, instead of sparking worries about disruptions to oil
output in the Middle East, Qatar’s loss of diplomatic ties with
Saudi Arabia, Bahrain, United Arab Emirates and Egypt, due to
accusations of Qatari support for terrorist activities, raised
worries over a potential collapse of the OPEC-led production
agreement.

Read: Here’s what you need to know about Saudi
Arabia’s spat with Qatar

Those involved, with the exception of two countries—Bahrain and
Egypt—are OPEC members.

“The diplomatic trouble comes on the back of accusations that
Qatar is ‘spreading chaos by funding terrorism and supporting
Iran’,’” analysts at JBC Energy wrote in a report Monday.

“The fact that Qatar’s stance towards Iran is a key element in
this issue does make for a potentially more complicated setup
at future meetings should the issue not have been resolved in
due time,” they said. OPEC’s next meeting is set for Nov. 30.

Jameel Ahmad, vice president of market research at FXTM,
however, said “it would be premature at this stage to suggest
that this development could have an impact on the OPEC deal.”

Even so, “a potential risk to monitor might be that Qatar will
view this as being provided with less encouragement to comply
with the agreed production quota,” he said.

Trump’s pull out from the Paris Accord

Then there’s Trump’s decision last week to pull out of the
Paris climate accord.

The move “threatens yet more support for the U.S. shale sector,
further delaying the process of rebalancing the market,” Enrico
Chiorando, a U.K.-based analyst at energy consultancy Love
Energy, said last week.

But even before Trump’s decision, his administration had
“already made significant progress on reducing regulation of
the U.S. energy industry,” according to Jay Hatfield, portfolio
manager of InfraCap’s MLP exchange-traded fund

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particularly in the area of pipeline approvals.  

And regardless of Trump’s move, the primary driver of the U.S.
oil-and-gas industry is the “ongoing exploration of shale
formations that make the U.S. the lowest cost incremental
producer of oil and gas in the world,” said Hatfield.

“This low-cost producer status is likely to allow the U.S. to
steadily increase its global market share of oil production and
eventually make the U.S. a net oil exporter,” he said.

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