OPEC: Deeper crude oil output cuts?

OPEC and its associated non-OPEC producers' decision in May to extend their production cuts for an additional nine months through to end-March 2018 has not been met with overwhelming enthusiasm by the oil market.

In fact, quite the contrary; the price of Dated Brent sunk from above $53/barrel in May to just $44.46/b June 23, although it has rebounded slightly in recent days to $46.47/b June 28.

If this slump is sustained, it may prove enough to stem the rise in the US oil rig count, although it is too soon to see any impact.

Yet this is hardly the dynamic that OPEC wished to set in motion.

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If the rise in the US rig count does stall, it will merely reaffirm the responsiveness of US shale production to the oil price.

If OPEC decides further cuts are necessary, and prices firm again, there is little to suggest that US rigs will do anything other than return to the field.

The number of US drilling rigs targeting oil rose by another 11 in the week ending June 23 to 758, according to Baker Hughes data, the highest level since October 2015, when drilling activity was contracting sharply.

As a result, the current outlook, according to the US Energy Information Administration, is for an increase in non-OPEC production this year of 700,000 b/d and then 1.4 million b/d in 2018.

Moreover, there is more bad news from within, although it represents good news for the two countries concerned. Neither Nigeria nor Libya are subject to output restrictions because of their internal security situations.

Both have seen a rebound in oil production and Libya's looks particularly robust, at least in volume terms.

In May, Nigerian oil output rose 80,000 b/d to 1.73 million b/d, according to the S&P Global Platts OPEC survey, while Libya's jumped 180,000 b/d to 730,000 b/d.

Although production from key fields in Libya remain subject to sporadic disruption, the country's National Oil Corporation is increasingly confident that production will hit the 1 million b/d mark by end-July.

NOC statements towards end-June said output had already pushed past 900,000 b/d.

As a result, while OPEC can point to 117% compliance for those members with production caps, it has to temper that achievement with the fact that after promising cuts of 1.2 million b/d, OPEC's total output in May was just 690,000 b/d below the October benchmark.

Worse still, Iraq is proving -- as expected -- a reluctant partner to the deal.

Arguably the country had just as much justification as either Libya or Nigeria for an exemption.

In the event, Iraqi production has averaged 4.415 million b/d from January through May, against an allocation of 4.351 million b/d.

Iraqi output rose in May by 70,000 b/d to 4.43 million b/d.

It is thus very hard to see where OPEC is heading.

Saudi and Russian ties appear to be strengthening. Rosneft CEO Igor Sechin's recent article in Russian daily Izvestiya was revealing.

Why would Russia's largest oil company so explicitly identify itself with Saudi Aramco, if the two companies' thoughts were not heading in the same direction, particularly on costs and technology?

A Russia-Saudi axis combines the world's two largest oil producers into one powerful force, but even that would probably not be enough, and where does it leave the rest of OPEC?

Even if OPEC can act cohesively, and in conjunction with its non-OPEC partners, it does not address the US shale "problem", nor the subsidiary long-term threat represented by the continuing development of Argentinian shale.

Shale has changed the oil market; it is time that OPEC recognized the fact.