• Saudi, Russian ministers try to assuage worry about US shale growth
• US output estimated to grow as much as 600,000 b/d this year
• Global supply crunch looms amid decline in investments

While the mood this week at CERAWeek by IHS Markit in Houston seemed distinctly more bullish than last year when global oil prices hovered just above $30/b, there was also an undercurrent of anxiety that the stability in the market of the past two months would be short-lived.

Many in Houston openly wondered if the landmark supply cut deal between OPEC and non-OPEC producers which had buoyed prices to above $50/b could be undermined by a corresponding increase in US shale oil production.

At the same time, looking further out, concerns of a supply crunch following roughly three years of dramatically reduced investment in longer-term projects loomed over the event.

Related CERAWeek Factbox:The oil themes of this year's conference

The unease over the US shale boom may have manifested Wednesday when NYMEX April crude settled down $2.86 at $50.28/b and ICE May Brent fell $2.81 to settle at $53.11/b on news that US crude stocks rose for the ninth straight week.

Crude futures extended that decline Thursday as NYMEX April crude settled $1 lower at $49.28 and ICE May Brent settled 92 cents lower at $52.19/b.

Perhaps foreseeing these moves, on Tuesday evening Saudi Energy Minister Khalid al-Falih orchestrated an impromptu news conference to, he said, "quell the concern" that a US shale comeback would mute the impact of the supply cut deal.

"I think the comeback of shale, to a certain degree, is not only welcome and acceptable but it's necessary because of the demand growth and the decline elsewhere," Falih said. "This is a big market."

Falih was joined at that news conference by Russian Energy Minister Alexander Novak, OPEC Secretary General Mohammed Barkindo and oil ministers from Iraq and Mexico, in a public show of support for the coordinated supply cut.

"We are fully committed," Novak told reporters through a translator.

Under the deal, OPEC agreed to cut 1.2 million b/d from its October levels while the 11 non-OPEC countries, led by Russia, agreed to cut an additional 558,000 b/d.

Novak said the majority of his discussions in Houston this week focused on whether the deal may be extended beyond June, when the six-month agreement is set to end, whether parties to the deal will conform to the agreed upon cuts, and what the response from US shale will be.

There seemed to be few concerns over conformity, however. According to an S&P Global Platts survey of analysts released Monday, the 10 OPEC members obligated to cut output under the deal had achieved 98.5% of their total combined cuts.

In addition, Falih and Novak gave no indication that an extension of the deal would be seriously considered until sometime in May and would be largely based on how closely OECD stocks could be reduced to the five-year average. But the impact of shale growth appeared to be a concern more difficult to overcome.

"One has to look at the complex situation, not just at a single factor, which US shale is," Novak said in an interview with S&P Global Platts on the sidelines of the conference. "You should not be looking at just shale on a standalone basis, you should be looking at the complex picture which is the supply and demand balance in all of the countries."

'SHALE REVIVAL' COULD OFFSET CUTS

Novak pointed to his own ministry's estimates that US shale could see year-on-year growth of about 400,000 b/d, but analysts said the supply increase could be much higher.

The International Energy Agency forecasts US tight oil production to be up about 500,000 this year from last year, although that assumes an average Brent price of $60/b.

During a conference panel, Aaron Brady, a senior director with IHS Energy Oil Market Services, said US shale oil production could grow by 600,000 b/d through this year.

"A big shale revival could offset the supply agreement," Brady said.

Platts Analytics' Bentek Energy forecast that US production will climb by more than 550,000 b/d by the end of 2017 and "higher prices would only incentivize stronger growth," according to Jenna Delaney, an analyst for Platts Analytics.

"If supply surprises to the upside, demand weakens more than expected in the wake of higher prices, or inventories don't trend in the direction the market is hoping for, a selloff of speculator positions could drive prices lower," Delaney said.

Since it peaked at about 9.63 million b/d in April 2015, US output fell as low as 8.57 million b/d in September 2016, a decline of 1.06 million b/d over 17 months, according to the US Energy Information Administration. The US is currently producing about 9.09 million b/d and is forecast to climb to 9.53 million b/d by the end of this year and to 10.08 million b/d by the end of 2018, according to EIA's Short-Term Energy Outlook this week.

The supply cut agreement has likely contributed to a modest increase in Bakken production forecast for this year, according to Lynn Helms, North Dakota's top oil and gas regulator.

"There's a lot more optimism," he said Wednesday, pointing to the state's climbing rig count and Marathon Petroleum's moves to increase its Bakken rig count sevenfold this year.

Spencer Dale, BP's chief economist, said while US producers are tracking the OPEC/non-OPEC deal closely, their decisions on future output are not based on conformity to the deal or whether it may be extended.

"US producers just respond to the price signal," Dale said Tuesday on the sidelines of CERAWeek. "They don't need to worry too much about seeing the volumes as long they can see the prices responding."

LACK OF NEW INVESTMENT

CERAWeek participants were also concerned that as producers have increasingly been focusing on shorter-cycle projects, new investment will be needed in conventional and offshore projects to provide forward supply growth.

John Hess, CEO of Hess Corporation, said a supply crunch "may be brewing over the next several years" due to the decline in investment resulting from global price collapse.

"Our message to the oil industry in Houston is invest, invest, invest," Fatih Birol, the executive director of the IEA, said from the conference stage Tuesday.

Prices could rise sharply by 2020 "unless significant new projects are sanctioned soon," he said.

John Watson, Chevron's CEO, also warned Wednesday that new investment was needed, even though earlier in the week the company said it will continue to focus its spending on shorter-cycle projects, including the US' prolific Permian Basin in West Texas and southeast New Mexico; 75% of the company's 2017 capital budget of $19.8 billion is expected to generate cash within the next two years, the company said.

ExxonMobil earlier this year announced an acquisition of oil fields in the Permian for $6.6 billion that indicated its view of the vast potential of the basin. On Monday, ExxonMobil CEO Darren Woods announced a $20 billion program over 10 years involving 11 separate projects. Collectively called Growing the Gulf, the program expects to capitalize on the basin's potential to turn out oil and gas, including for export, and produce an array of products.

In its five-year outlook, released Monday, the IEA said global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices unless the upstream industry approves new projects soon.

But during a panel Tuesday, former EIA administrator Adam Sieminski said there a lot of variables which could shift fundamentals and prevent that supply crunch. Oil now constrained in Venezuela, Sudan or Nigeria, for example, could come back on the market, he said.

"Supply gaps generally tend to get filled by something -- it just depends on timing," he said.

--Brian Scheid, brian.scheid@spglobal.com

--Edited by Jason Lindquist, jason.lindquist@spglobal.com

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