Oil hovers near $70 highs while USA and Canada output increases

Russia May Exit OPEC Production Agreement

Oil has extended gains after a second annual advance as the Organization of Petroleum Exporting Countries and its allies trim supply to drain a global glut.

"When oil goes up inflationary expectations go up as well, even if they are long-term inflationary pressures", Andres Garcia, CEO at Zoefin.com, told The Street this week, discussing the inflationary pressures. USA production is now forecast to rise to 10 million barrels a day by next month, fully four months faster than previously expected. Crude demand will expand by about 1.5 million barrels a day in 2018, OPEC Secretary-General Mohammad Barkindo said at a conference in Abu Dhabi. "The only headwind to higher prices is rising United States production".

But in the last month or so, prices have been rising and as I write the Opec Basket is at $67.38 and Brent at $69.16 and the earlier expected range forgotten. If global demand for oil keeps increasing as it has - mainly due to the fall in prices - the level of supply will not be able to catch up.

The Baker Hughes data shows that the increase in US drilling lasted 14 months before stalling in the second half of a year ago as some producers trimmed their 2017 spending plans after prices turned softer over the summer.

The threat comes not just from onshore shale production, but prices are now high enough that major multibillion-dollar offshore projects could get financing.

Major oil producing-countries have grown concerned that as prices remain near these levels, it will spur additional production from USA shale plays, risking overwhelming the market with additional supply, and hurting OPEC's market share.

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According to the country's economy ministry, total oil production climbed 10.5 percent to 86.2 million metric tons in 2017 from the year before - which implies that Kazakhstan's output in November and December was about 130,000 bpd above the OPEC target; moreover, Kazakhstan is said to be planning to increase production to 87 million tons this year, or about 1.81 million bpd compared with an OPEC target level of 1.74 million barrels.

"On our current outlook 2018 may not necessarily be a happy new year for those who would like to see a tighter market". They expect USA production to grow by 600,000 bpd in the first quarter of 2018 compared to a year earlier. The rally will essentially stop when the hedge funds stop buying.

Bloomberg reported that Kazakhstan has overtaken Iraq to become the biggest over-producer in the cartel, with output rising over the past year due to the Kashagan field - this is despite Kazakhstan's pledge to pump 20,000 barrels per day (bpd) less under the OPEC agreement.

Other bank analysts believe the increases could come sooner. EIA estimates that, absent significant pipeline constraints, moving crude oil from Cushing, Oklahoma, to the U.S. Gulf Coast typically costs about $3.50/b.

Saadallah Al Fathi is former head of the Energy Studies Department at the Opec Secretariat in Vienna.

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