When Khalid Al-Falih arrived at Davos in late January, the Saudi oil minister was exultant. The output cuts he'd painstakingly arranged with fellow OPEC states and Russia were working so well, he said, they could probably be phased out by June.
Almost five months later, U.S. production is rising faster than analysts predicted and his plan has been shredded. In a series of phone calls and WhatsApp messages late last week, Al-Falih told his fellow ministers that more was needed, according to people briefed on the talks, asking not to be named because the conversations are private.
In their battle to revive the global oil market, the Organization of Petroleum Exporting Countries and its allies are digging in for a long war of attrition against shale.
"OPEC is now recognizing they need longer -- and potentially deeper -- production cuts than they have anticipated," said Jamie Webster, a senior director for oil at the Boston Consulting Group Inc. in New York.
From the beginning, Saudi Arabia saw a quick one-off intervention: reduce production for a few months and speed up the recovery. The strategy had an option for a six-month extension, but the Saudi government initially thought it wouldn't be needed. U.S. shale, the plan assumed, wouldn't recover fast enough.
And yet, shale has defied the naysayers. By the time OPEC meets in Vienna on May 25, U.S. output will be approaching the 9.5 million barrels a day mark -- higher than in November 2014 when OPEC started a two-year price war. The rebound has been powered by turbocharged output in the Permian Basin, which straddles Texas and New Mexico.
Forced to adjust to lower prices, shale firms reshaped themselves into leaner operations that can thrive with oil just above $50 a barrel.
Since OPEC agreed to cut output six months ago, U.S. shale production has risen by about 600,000 barrels a day, wiping out half of the cartel's cut of 1.2 million barrels a day and turning the rapid victory Saudi Arabia foresaw into a stalemate. Al-Falih said this week that Saudi Arabia is now pushing to extend the cuts "into the second half of the year and possibly beyond."
On Thursday, OPEC's monthly oil market report said production from nonmembers would rise 64 percent faster than previously forecast this year, driven mainly by U.S. shale fields.
So far, OPEC hasn't been able to "cut supplies faster than shale oil can increase," said Olivier Jakob of consultant Petromatrix GmbH.
Al-Falih and his OPEC allies have made some progress. U.S. crude stockpiles have started to drop, and the amount of oil in floating storage is contracting. The International Energy Agency and banks including Goldman Sachs Group Inc. predict a further contraction in stockpiles in the second half of the year.
Yet, the cartel faces big risks. The most prominent is that extending cuts lifts the oil price high enough for shale to hedge again, as it did earlier this year.
"The dilemma now for OPEC and their key non-OPEC partners, Russia and Oman, is that cutting to support prices risks stoking the embers of a shale firestorm," said Adam Ritchie, director at Petro-Logistics in Geneva.
Business on 05/13/2017