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Any OPEC outcome except free-for-all could help US shale producers

Vienna — US shale oil producers will likely benefit from any decision OPEC makesthis week in Vienna, with the exception of a complete breakdown in unitythat created the current supply quotas.

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"The US is in a strong position either way here," director of oil andproducts research at Morningstar Commodities and Energy Sandy Fieldensaid. "I think you'll see a benefit even if OPEC increases production,provided that they don't allow prices to fall below $40/b. And there'sabsolutely no incentive for OPEC to allow that to happen."

Permian Basin drillers are making money despite steep Midland discountscaused by a lack of Texas pipeline capacity that is expected to continue untilmid-2019. Oil prices would have to fall sharply to change that picture,analysts said.

US shale was long seen as a rival to OPEC, but those tensions may besubsiding as a global supply shortage looms. Several CEOs of international oilcompanies, including US drillers Pioneer Natural Resources and Hess, willaddress the OPEC International Seminar on Wednesday in Vienna, at timessharing a stage with OPEC ministers. The production group will then meetFriday to discuss changes to its supply cut agreement that took effect inJanuary 2017.

Rapidan Energy Group President Bob McNally said chaos would be the onlyoutcome to Friday's meeting in Vienna that would be negative for US drillers.

"If there was a disorderly breakdown of unity, and everyone went back tomaximum production, if we go back to 2016 where everyone is going to themax, that could risk a price implosion," he said. "If you're a shale oilproducer, you don't want that."

That's why McNally thinks US shale producers are praying this week foranything but a free-for-all.

"I think many shale producers before they go to bed include in theirprayers to the Lord the continued success of the Vienna Group. I'm onlyhalf-joking," he said, pointing to Oklahoma's governor in December 2016declaring a day of prayer to thank OPEC for reaching the supply cutagreement.

GLOBAL SUPPLY RISKS

S&P Global Platts Analytics expects OPEC to agree to a modest 600,000 b/dincrease in production quotas. With most member countries already pumpingat capacity, Saudi Arabia will likely make up any shortfall.

Platts Analytics' head of supply and production Shin Kim said substantialrisks to global oil supply include Iranian imports falling 300,000-600,000 b/din the fourth quarter after US sanctions go back into force, as well asVenezuela's oil industry turmoil, the resurgence of fighting in Libya andNigerian elections that could renew oil attacks.

"With mounting disruptions, global oil markets need US shale crudeproduction," Kim said. "But as shale responds with further expansion, we arelikely to see more inland bottlenecks and this will benefit US refiners."

Analyst with Hedgeye Risk Management and former Department of Energychief of staff Joe McMonigle said US drillers and OPEC ministers likely bothwant higher prices right now, even with the looming supply risks.

"We are entering a phase here where capex decisions are going to beingmade and there has to be a certain price level, especially on bigmega-projects," he said. "There has to be confidence that prices will besupportive."

Citi Group's global head of commodity research Ed Morse sees no downturnin US drilling as a result of the OPEC meeting's outcome because drillersare fairly well insulated from price changes through the end of the year.

"Their level of hedging through the end of the year is very high," Morsesaid. "They're hedged at about $50/b, and their break-evens aresignificantly lower than that. So I think the issue is what happenssubsequent to that."

Morningstar's Fielden said Permian producers will keep drilling as longas the Midland wellhead price is above break-even costs.

"Even if US crude is discounted to world prices, it's still going to finda place in the market as it has been doing for the last five months of2017," he said. "In 2018, we've seen a slow and steady build-up inexports to a point where we're at a high level."

-- Staff, newsdesk@spglobal.com

-- Edited by Jonathan Dart, jonathan.dart@spglobal.com