OIL prices are tanking, falling below $49/barrel last week. WTI and Brent futures dropped below their 200-day moving averages. Rising US shale output, resumption of production from two major Libyan fields and the European Central Bank's decision to leave interest rates at zero percent nudging the US dollar higher - all contributed to making oil lose some shine. The US crude output has gone up 10 percent since mid-2016, standing at 9.27 million bpd, the EIA reported. The energy equation weakened further by the large buildup in gasoline inventory in the US last week, as refineries pumped a record volume of crude, indicating a relatively weak gasoline demand - despite heading towards the peak summer driving season. Hence the US gasoline futures plunged 3.1 percent last Thursday, touching the lowest levels since February 28. Markets didn't expect this! All this was despite fact that the markets have been finding support from the news that major OPEC and non-OPEC oil exporters were closing in on the extension of the crude output cut deal for an additional six months. The decision to this effect is expected at the next OPEC meeting, scheduled on May 25, in Vienna. A consensus seems emerging among the crude producers' that the effort to curb supply should be prolonged. «There seems to be a consensus in that direction, but we're not 100 percent there," Energy Minister Khalid Al-Falih conceded after meeting Azeri Energy Minister Natiq Aliyev in Baku. "We still need to talk to all countries. A very important country to talk to, of course, is Russia, the biggest non-OPEC exporter." Al-Falih is scheduled to meet his Russian counterpart Alexander Novak over the next couple of weeks to discuss their next move. Already the chatter is around. What if producers don't agree to extend the output cut? Crude will probably drop to $40 a barrel or even below unless OPEC and allied producers extend their collective cuts in output beyond June, according to analysts, including Christof Ruehl, formerly the BP chief economist, who now heads the research wing of the Abu Dhabi Investment Authority. The six-month cuts that took effect in January have set a floor for prices, but an increasing supply of US shale oil together with record-high inventories are keeping the per-barrel price of crude from rising beyond the upper $50s, Ruehl said at a conference in Dubai last week. "If OPEC and the coalition don't extend the agreement to continue cuts, that price floor will go... without it, prices would fall, and there's nothing to stop oil going below $40 a barrel," Ruehl added. Producers won't be able to overcome and eliminate the excess stored oil unless they extend their output limits into the second half of the year, Ruehl asserted "The market is looking for a direction right now and ending the production cuts would be negative for oil prices," Edward Bell of Emirates NBD PJSC was quoted as saying. "Without a deal, oil could certainly be pushed below $40." A drop to $40 a barrel is "a clear option" should OPEC not agree to extend cuts next month, Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, also seemed to be agreeing. Robin Mills of the Dubai-based consultancy Qamar Energy is of the view that an extension by OPEC and nations outside the group is already priced into oil markets. He expected the deal to be prolonged, agreeing to the notion that prices would fall to as low as about $40 a barrel without an extension. But the output cut deal is extracting a price of its own too. One consequence of the cuts for OPEC is that Iraq and Iran are gaining market share at the expense of the group's biggest member Saudi Arabia. "If you're talking about winners, you can count Iran and Iraq," Ruehl said at the Dubai conference in Dubai. Saudi Arabia, the OPEC's biggest producer, agreed to cut output by 486,000 barrels a day. However, Saudi Arabia cut production from about 10.5 million barrels a day in December to as low as 9.87 million daily in January and 10 million a day last month, data compiled by Bloomberg reported. Iran's output, meanwhile, rose to 3.8 million bpd in January, the highest since April 2010. Iran has boosted production in part due to the end of sanctions restricting its oil sales in January 2016, while Saudi Arabia has made more than its share of output cuts, Ruehl said. Neighboring Iraq pumped 4.43 million bpd in March, down 200,000 barrels for the year, and not 210,000 bpd as was committed, the data indicated. "The Saudis are losing out because other countries are able to squeeze out more production," Bell of Emirates NBD said. In order to hold on to its share, Saudi Arabia is cutting crude pricing to Asia, Bell pointed out. This also brings to fore the issue of market share, especially in the Asian markets. Iran and Iraq increased crude sales to China last month, while Saudi Arabia slipped behind Russia and Angola, data released by the Chinese General Administration of Customs reported. The issue of rapid increase in shale output is also coming into the overall picture. Shale oil output in the United States is rising much faster than expected and gaining market share globally, increasing the risk of a «volume war» with OPEC and weaker oil prices, the founder of oil and gas consultancy Rystad Energy said. Rystad Energy expects US shale oil output to grow by 100,000 bpd each month for the rest of this year and into 2018 if oil prices hold around $50-$55 a barrel, well above estimates by the US Energy Information Administration for monthly gains of about 29,000 bpd in 2017 and 57,000 bpd in 2018. Strong returns in the shale sector are pulling in fresh investment, while round-the-clock drilling and new rigs are boosting production, he underlined. US shale oil output was thus set for its biggest monthly rise in more than two years in May, government data showed, jumping by 123,000 bpd to 5.19 million bpd. Total chief executive Patrick Pouyanne warned last week that the rapid increase in shale output could push oil prices down again by year-end. The rapid rise in investments and the break evens getting lower and lower - some say in the 30s now - shale output continues to grow, especially in the sweet spots of the (US) Permian basin. Weakness in the oil markets could help deflate the momentum of US shale. Yet, in order to meet their budgetary requirements, oil producers need the markets to strengthen. Cutting oil markets could definitely help this cause. Producers› are faced with a Catch-22 situation. A real dilemma is confronting them today. Available options are not easy. A whole bunch of variables needs to be accounted for - before reaching a conclusion on May 25. The growing shale output is just one of many.
