Oil: Free market trumps OPEC policy

OPEC's policy manipulation is no match for sheer market forces, say analysts, as US shale producers continue to ramp up production, but $US50 ($67) a barrel looks to be the floor.

American shale drillers are expected to increase output again in June, totalling an expected 5.4 million barrels a day, according to the Energy Information Administration.

This caps off a 10 per cent recovery in US shale production growth since September and an explosion of activity in the Permian Basin in Texas and New Mexico.

Shale drilling has become increasingly profitable since oil prices largely stabilised above $US50 a barrel at the beginning of the year, when OPEC and 11 other exporters agreed to take 1.8 million barrels a day of production off the market.

But the oil price looks to be on shaky ground, dipping to $US47 a barrel earlier this month and re-igniting discussions to extend the existing agreement by nine months.

"Right now it's a Permian story," said Helima Croft, global head of Commodity Strategy at RBC Capital Markets, referring to a US shale producing region. "It's come back bigger, faster and stronger."

"And it's the kind of thing that undercuts these OPEC, non-OPEC efforts, this verbal intervention."

While it looks to be push-and-pull between the policymakers in the Middle East, North Africa and the technologically advanced drillers in the US, Ms Croft argues a mid-fifties oil price has room for almost everyone.

"The growth in US shale production will put a cap on oil prices," she writes. "At least barring a major geopolitical blowout that takes significant quantities of production elsewhere offline.

"However, an extended stay in the mid-fifties would likely be fine for the flusher GCC (Gulf-country) producers that drive the OPEC bus and key non-cartel producers like Russia.

"It will allow them to execute core policy priorities, limit the size of their deficits and keep borrowing costs manageable."

The OPEC nations are discussing whether a six-month or a nine-month agreement might be the most supportive, though there would not be a huge amount of additional inventory drawdown in a longer program.

Indeed, the longer period is intended to dampen the potential for a return to oversupply when the cuts unwind.

Compliance is top of mind for experts, who are skeptical the likes of Russia can resist upping their output should prices creep towards $US60 a barrel.

"We remain skeptical about Russian compliance," says Greg Priddy, director of global energy and natural resources at Eurasia Group.

"OPEC's secondary sources data showed weak compliance through March, and the reported drop to full compliance in recent weeks seems suspicious and conveniently timed."

Oman's compliance was originally in question and given its output has a material impact on global supply had analysts worried, but since the cuts took affect in January, it seems the Arabian nation has played ball.

Libya and Nigeria tend to be the problem children.

Libya has the largest oil reserves in Africa and while most OPEC nations are looking to curb supply, the politically divided Libya has ramped up output, pumping more than 814,000 barrels a day into the global market, thanks to the restarting of two major plants.

Nigeria, which slid into recession for the first time in 25 years last year and has had to contend with a armed militancy in Niger Delta disrupting oil supply, has at times ignored output restrictions.

But while the output numbers may look to spoil the cartel's plan, Ms Croft argues the political and security instability in the region undermine Nigeria and Libya's ability to rock the output boat.