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'Crunch is looming' for oil supplies

09 March 2018

Oil & gas industry needs $20 trillion to meet demand in next 25 years. "We are going to see a major second wave of USA shale production coming". This year, the United States could surpass Russian Federation as the world's largest oil producer.

"There is a worldwide obsession with shale".

Conflict between the USA and Iran is potentially one of the top geopolitical risks to the oil mar-ket this year.

IEA Director Fatih Birol says, assuming the USA production continues to grow in areas like the Permian Basin, oil prices would be around $60 a barrel, which is below the current worldwide price of $65.64 a barrel. Traditionally, OPEC's Gulf cooperation council members, Saudi Arabia, Kuwait and the United Arab Emirates have made extra investments to carry spare capacity to respond to sudden supply shocks and/or to punish usurpers who could challenge OPEC for market share.

IEA Executive Director Fatih Birol made the remarks to reporters at the CERAWeek by IHS Markit that kicked off on Monday in Houston in the USA state of Texas. OPEC Secretary-General Mohammed Barkindo said there is a common understanding between the two sides.

"We have compared notes".

Exxon Mobil Corp and others have said they expect rising petrochemical and aviation fuel demand to offset a drop in demand for liquid fuels such as gasoline. OPEC cuts have paved the way for further shale supply which has filled the void left by OPEC.

The market has recovered mostly since the OPEC cartel partnered with Russian Federation and other producer nations to cut output in 2017.

The Organization of the Petroleum Exporting Countries (OPEC) will hold talks with the representatives of the financial market, including hedge funds, on the sidelines of the CERAWeek that takes place in USA city of Houston, OPEC Secretary General Mohammed Barkindo said on Tuesday. The EIA expects that US will supply much of the world's additional oil for the next few years. The aim was to drive prices down and push USA shale producers into bankruptcy. The shale industry includes hundreds of companies, many of which must answer to public shareholders. Instead, more discipline may come from pressure brought by company shareholders. Higher prices have allowed companies to increase output, reduce debt, improve cash flow, hedge production forward, and boost exports.

The longer-term prospects are dimmer, even in Asia's largest market. And with USA production expected to keep surging, OPEC's caps may prove less effective in boosting prices. But in the age of USA oil abundance, OPEC's Gulf members are questioning whether this approach continues to make sense.

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Meantime, the cartel has been discussing alternative ways of measuring global supply to replace the OECD stockpiles estimate, which OPEC considers does not give accurate evaluation of the inventories. One trader on Twitter opined: "Everything I hear from OPEC folks points toward the "muddle through and hope for the best" option".

But for now, extending the actual production cuts is another matter. Global demand growth would average only 1.1%.

Demand for ethane will expand at the fastest pace in the next five years, rising by 885,000 bpd, followed by naphtha with growth of 495,000 bpd and LPG with growth of 40,000 bpd, it forecast.

The export market will also still be constrained even with Enbridge's expected 450,000 barrels a day of expansion, but the IEA raised doubts that the capacity additions from Kinder Morgan's Trans Mountain and TransCanada's Keystone XL pipeline projects will actually get built.

Global oil demand obviously is much stronger than people think it is, or maybe shale oil production is not as prolific as the International Energy Agency (IEA) keeps telling us it is.

The gathering comes against the backdrop of an extension in output cuts led by Opec, along with other oil producers including Russian Federation, in a bid to absorb a global oil glut and boost prices.

While Calgary-based producers worry about a lack on investment in Western Canada, they are not alone.

Crude oil prices tested resistance near a downward sloping trend line that connects the highs in February to the highs in March and comes in near Tuesday's highs at 63.30. "It's irrational exuberance in the US, and it's irrational fear in the rest of the world", Hess CEO John Hess said.

What about prices in the short run? It is clearly anxious about its market sway, and formalizing its partnership with non-OPEC allies would give it broader influence.