As ministers from Organisation of Petroleum Exporting Countries (Opec) and Russia meet in Oman during the weekend, to review the market scenario, they seem faced with a Catch-22 situation.

Thanks to the Opec-Russia output restraint deal, crude prices have climbed to almost $70 a barrel, renewing fears about growth in non-Opec output.

However, looming over this price recovery is the United States’ shale output, which played a key role in helping create the glut and killing a short-lived rally early last year too.

A concern is now growing in the industry that as markets rebound, US producers will turn on the taps and flood the market with oil, stuttering the oil price recovery.

Oil prices slid 1 per cent on Friday and were on track for the biggest weekly falls since October despite hitting three-year highs earlier this week as concerns over growing US production outweighed tightening global supplies.

Some are hence underlining; the current price resurgence will renew interest in more costly, second-tier shale projects that were shelved after prices tanked in 2014.

Already the US industry is gaining momentum. The US shale oil production will grow by 111,000 barrels per day (bpd) to nearly 6.6 million in February, the US Energy Information Administration forecasted last Tuesday.

The overall US crude production rose to 9.75mbpd last week.

Opec is also admitting that non-Opec output is growing.

In its just-released Monthly Oil Report, Opec raised its forecast for non-Opec supply in 2018. “Higher oil prices are bringing more supply to the market, particularly in North America and specifically tight oil,” Opec said in the report, raising the expected growth in total US crude supply by 110,000bpd to 820,000bpd.

This is no good news for producers. From Iran’s oil minister to Goldman Sachs Group Inc, all keeping an eye on the emerging trend, Bloomberg’s Grant Smith wrote last week.

“There are many reasons they’d be concerned, but on top of the list is: how will US production respond?” Mike Wittner, head of oil-market research at Societe Generale SA in New York told the press.

“Getting too far above $70” can both stimulate new supply and affect the economy, Jeff Currie, head of commodities research at Goldman Sachs, said in a television interview.

Firm crude markets have resulted in significant new investments in non-Opec areas, especially the US.

“There is an unintended consequence from this higher price,” Ed Morse, head of commodities research at Citigroup Inc was quoted as saying. “Opec is fearful of not only the shale response but of deep water and oil sands from Canada.”

“Prices over $60 per barrel will lead to more US shale production,” a research note from TD Economics said, earlier this month. “With production on the rise in the US - in addition to increases in Canada, Brazil and the North Sea - it is unlikely that prices will stay above that threshold on a sustained basis.

“What’s more, with such a high level of speculation in the market, the risk for prices heavily skews to the downside,” the note underlined.

“The upside is now limited for oil prices,” Reuters quoted Fawad Razaqzada, market analyst at brokerage Forex.com as saying.

“US oil producers will ramp up production in the coming months,” Razakzada appeared firm in his projections.

Some are also pointing to the fact that the speed with which spot prices have risen in the past few weeks is now raising the prospect of a short-term correction.

Major investors continue to push their bullish bets on oil futures to new heights, confident that the rally still has more room to run.

Strong demand, falling inventories and geopolitical uncertainty have fueled a sense of optimism not seen in years. But the risk is that investors are taking things too far, at least in the short run, argues Nick Cunningham.

John Kemp writing for Reuters recently put it, the “accumulation of bullish positions is easily the largest on record and far outstrips anything seen even during the spike in oil prices during late 2007 and the first half of 2008.”

Hedge funds now hold more than 10 long positions in oil futures for every short, a ratio that is sharply up from 1.60:1 from June 2017, he underlined.

Such lopsided positioning looks overstretched, which could prompt a sell-off as investors scramble for the exits, Cunningham hence argued. That kind of correction in both, hedge fund positioning and crude prices, has happened several times in just the past few years.

Opec may be forced to take an exit from the output restraint arrangement - in not too distant a future - one could now argue with some degree of confidence.

Published in Dawn, January 21st, 2018