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Welcome to the worried edition of Oil Markets Daily!

Our inbox was filled with requests to update our thoughts on potentially higher than expected production coming out of US, Libya and Nigeria. The questions started flying when Libya's National Oil Company (NOC) announced that Libya's production is above 800k b/d and could reach 1.1 - 1.2 million b/d sometime this year. In addition, Nigeria's Forcados is returning and exports are expected to increase.

Let's address US shale first

In the latest EIA crude storage report, Lower 48 production rose again bringing overall US oil production to 9.314 million b/d.

The question on everyone's mind is just how fast can US shale grow this year?

Our current estimate pegs US crude production to average 9.45 million b/d this year. Second half of the year should see US shale production increasing to exit rate of about 9.7 to 9.8 million b/d. The pace of the increase is about 12k b/d per week.

The issue is that the current bottleneck we are seeing in the Permian (primary shale basin growth) will escalate towards the year end as storage capacity and takeaway capacity become strained. Even if US shale producers have access to capital and the ability to grow production aggressively, infrastructure support won't allow it to happen. In addition, there isn't enough frac crews to help service the Permian resulting in servicing cost pressure and other negative headwinds for producers in the region.

So how fast can US shale grow this year? We should see exit around 9.7 to 9.8 million b/d, and that's assuming infrastructure constraint. Any labor shortage along the way will see this figure reduced.

Libya

Is Libya really producing over 800k b/d?

Not likely, but 50k b/d here and there won't make that much of a difference in the global supply outlook. The question we should all be asking is if Libya can really increase production by an additional 400k b/d.

Libya's NOC currently attributes the shortfall in production to disputes with Wintershall, BASF's oil and gas arm.

Our analysis of Libya's situation is a bit more complicated than that. We think NOC is taking the stance that it somehow has access to capital to bring the production back online. Currently, Libya lacks adequate capex and expertise to bring back aging fields that have been neglected for the last 5 years. The issue with bringing old field production is the loss of pressure in the reserve, so servicing firms are required. If conflicts continue, it's unlikely Libya will receive the adequate technical expertise to progress with revitalizing its aging fields. The gist of the story is that NOC is likely talking out of the other end rather than the logical end.

Libya conflicts are also far from over, so these comments are likely just ego boosters rather than something useful for forecasting purposes.

Nigeria

Recent developments in Nigeria point to recovering oil production. The government's talks with militants and Delta leaders have contributed to peace in the region this year. Our forecast is for Nigeria's oil production to increase gradually from 1.6 million b/d to 1.8 to 1.9 million b/d.

Conclusion

Most estimates we've seen have already baked in the assumptions we are using, and the result continues to point to an oil market that's going to be severely undersupplied for the 2 nd half of 2017. The expected demand growth increase will further widen the supply and demand deficit, and carry well into 2018. Nothing has changed on the bull thesis.

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With U.S. Shale, Libya, And Nigeria Ramping Productions, Should ... - Seeking Alpha

Bloomberg

Dispute in Libya Affects Wintershall Oil Production Wall Street Journal (subscription) A dispute between two arms of the Libyan state has ensnared German oil company Wintershall AG, dragging down Libya's crude production and creating a new obstacle in the country's attempt to revive its oil industry after years of fighting. After nearly ... Libya says its oil production tops 800000 barrels per dayFox News Libya Pumping Most Oil Since 2014 Even as Dispute Slows RecoveryBloomberg Libya's oil production rise overshadowed by Wintershall disputeFinancial Times Reuters -The American Interest all 22 news articles »

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Dispute in Libya Affects Wintershall Oil Production - Wall Street Journal (subscription)

Saudi Arabias energy minister Khalid al-Falih tried to put the markets at ease by all but confirming that OPEC would extend its production cuts through the end of the year. He tried to talk up oil prices even further by hinting that the group might even agree to a 9-month extension.

With the OPEC cuts seemingly assured for little while longer, surely the global surplus is poised to shrink in the relatively near future, pushing up prices? Perhaps. But higher production from within OPECcould once again lead to disappointment.

Libyas National Oil Corporation just announcedthat it ramped up production to a two-year high of 796,000 barrels per day (bpd). That should definitely be a cause for concern for the oil bulls out there. For much of the first quarter fighting in Libya knocked production offline, briefly taking output below 500,000 bpd. The outages were one of the rare bits of bullish news amid a sea of oversupply. But just as Libya appeared to present risks to global supplies, it has once again restored output and then some. Just shy of 800,000 bpd, production is the highest it has been since October 2014.

Even better for Libya (but worse for oil prices), Libya is aiming to ramp up production to 1.2 mb/d by the end of the summer. That seems like a long shot, and maybe it is. But if we have learned anything from Libya this year it is that anything can happen. Multiple times over the past few months the National Oil Company has added 100,000 or 200,000 bpd almost overnight. As recently as the end of April, the NOC said Libya was producing 700,000 bpd; a few days later it is producing just about 800,000 bpd. So, one cannot rule out the possibility that the NOC achieves its goal. If that comes to pass, Libya would add another 400,000 bpd over the course of the next few months.

One thing working in Libyas favor is that the political process is progressing. Libya has been torn apart by political jockeying between rival factions as much as it has been by militant fighters, so the fact that the governments of east and west agreedto form united institutions and a national army in early May bodes well for some degree of reconciliation.

Another country that could spoil the efficacy of the OPEC extension is Nigeria. Reuters reported on Tuesday that Royal Dutch Shell is conducting tests on its Trans Forcados oil export pipeline, which has been offline for the better part of a year. In early 2016, the Niger Delta Avengers successfully pulled off a seemingly endlessstring of attacks on Nigerias oil infrastructure, knocking more than a half million barrels per day offline. Forcados was one of the most critical targets, a pipeline that is responsible for 200,000 to 240,000 bpd of exports when operational. Reuters said that exports could restart as early as this weekend.

Libya and Nigeria are exempt from the OPEC cuts, so they are not bound by any international agreements to keep a lid on production. In fact, both countries are in desperate need of higher output. There is no guarantee that they can succeed in bringing production back online, but at the upper end, they could potentially combine for some 800,000 bpd of additional supplies this year. That would more than offset Saudi Arabias cuts under the OPEC deal, and in fact, it would account for just about two-thirds of the groups entire reductions. Again, this is far from inevitable, but entirely possible.

Iraq poses a third risk from within OPEC, although to a lesser degree. Iraq is subject to the production limits, even if some Iraqi officials insist they should have also received an exemption. Iraq signed on to cuts of 210,000 bpd last November, and compliance has been decent but spotty. Through the first three months of the year, Iraq has made some cuts but has still not brought production down to its promised target. It still has time to comply, but because the deal is a six-month average, it would need to bring output well below its target in order to bring the average sufficiently down.

More worrying from OPECs perspective is the fact that a few commentsfrom some powerful Iraqi officials have hinted at more production gains ahead. Iraqs oil minister said earlier this year that his country could ramp production up to 5 mb/d this year. He could have been talking about capacity, rather than what will actually be produced, but that would be well in excess of Iraqs promised limit of 4.35 mb/d. Related:Gas Looting In Mexico Turns Deadly

All signs still point to an agreement on an extension of the cuts in Vienna in a few weeks time. But Iraq could undermine the resolve of the group if it pushes for an exemption. Or, more likely, it will agree to extend the cuts, but will continue to comply at a less-than-100-percent rate. Ultimately, that could spur weaker compliance from other members, especially if oil prices fail to rally.

Libya and Nigeria are altogether different. They could add large new sources of supply regardless of what OPEC agrees to.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

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Libya, Nigeria, And Iraq A Triple Threat To The OPEC Deal - OilPrice.com

* Little clarity on how U.N.-mediated deal can be reset

* Angry reaction in Tripoli to idea of Haftar as army leader

* Diplomatic push seen as lopsided and uncoordinated

By Aidan Lewis

TUNIS, May 10 Libyan military commander Khalifa Haftar, a figurehead in the east of the country, and Fayez Seraj, the head of a U.N.-backed government in Tripoli, appeared at ease as they broke more than a year of deadlock between them at talks in Abu Dhabi last week.

The meeting may have been amicable but it is unclear if either man will sway a complex array of factions on both sides of Libya's divide towards compromise.

Also unclear is whether foreign states with divergent strategies in Libya will help them do so -- especially as U.S. President Donald Trump has yet to spell out a policy on Libya.

At stake are the prospects for stabilising and unifying Libya, which splintered into competing fiefdoms after the NATO-backed uprising that toppled Muammar Gaddafi in 2011.

Western powers had hoped Seraj's Government of National Accord (GNA) would play that role. But though oil production has risen and Islamic State was defeated in its stronghold of Sirte under its watch, the GNA has been unable to extend its authority or resolve acute security and economic crises since arriving in Tripoli in March last year.

Haftar, meanwhile, built his power base in the east, spurning the GNA as his self-styled Libyan National Army (LNA) took control of most of Benghazi and oil facilities to the southwest.

As the international community pressed to reset the U.N.-mediated deal that created the GNA, Haftar shunned dialogue, refusing at the last minute to meet Seraj in Cairo in February.

"The fact that they met this time was important," said a senior Western diplomat. "Haftar has moved...he is now sounding more amenable to compromise."

STRONGMAN IMAGE

Last month there was also a meeting in Rome between the heads of two parliaments based in Tripoli and the east, one aligned with the GNA and the other with Haftar. Both are naming delegations to negotiate the details of a deal.

But there are few obvious signs of convergence. A statement from the Haftar camp in Abu Dhabi stressed support for the military, battling terrorism, and "addressing the proliferation of armed formations" mirroring the image Haftar projects as a strongman who can crush extremism and curb militias.

Seraj's statement reflected conditions that could contain Haftar -- placing the military under civilian authority, building a democratic state, and preserving "the principles of the 17 February (2011) revolution".

Haftar is said to want a three-member ruling council that includes himself and Aguila Saleh, head of the eastern parliament, alongside Seraj.

But that would leave out key constituencies represented in Seraj's current leadership council, including southern Libya and the city of Misrata, whose powerful military brigades have been broadly aligned with the GNA and against Haftar.

Some more radical Misrata militias that still back an ousted, Islamist-leaning government, and have recently lost ground in Tripoli, are vehemently anti-Haftar.

But even more moderate armed factions aligned with the GNA in the capital reacted with unease after the Abu Dhabi meeting they saw as unfairly bolstering Haftar's strongman position.

"We have said numerous times no to military rule and Tripoli is a red line, whether for Haftar or anyone else," Hashem Bisher, a prominent commander, wrote on his Facebook page.

The reaction became wider and angrier when Seraj's Foreign Minister Mohamed Siyala made comments on Monday that suggested acceptance of Haftar as the head of a national army.

One brigade said it had shut the foreign ministry, where pictures of Haftar were posted captioned: "No to the war criminal Khalifa Haftar".

The Benghazi Defence Brigades (BDB), which includes fighters who have been battling LNA forces as they push west and south, condemned Siyala's comments and questioned the GNA holding "suspicious conferences and meetings".

Seraj did not travel to Egypt for a follow-up meeting with Haftar originally expected on Thursday.

DISJOINTED DIPLOMACY

Western diplomats say foreign mediation has to be synchronised for a political deal to be reached.

The Abu Dhabi meeting was brokered by Haftar's two most prominent foreign backers, the United Arab Emirates and Egypt. Both share the Haftar camp's distaste for the Muslim Brotherhood and back his military campaign against Islamist militants.

Algeria, which hosted a round of talks this week, and Tunisia, are pushing a more inclusive approach. But diplomacy has been disjointed, in part because of uncertainty over U.S. policy under the Trump administration and a delayed leadership change at the United Nations' Libya mission.

That has left a vacuum that medium-sized players with different approaches have been battling to fill, said Jalel Harchaoui, a geopolitics researcher at Paris 8 University specialising on Libya.

"If the U.S. takes a keen interest in Libya again, they would be the only player that could unify these efforts," he said. (Additional reporting by Ahmed Elumami; Editing by Patrick Markey)

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Way forward for Libya uncertain despite "breakthrough" meeting - Reuters

The Libya Observer

UAE deployed US-made fighter aircraft to eastern Libya forces The Libya Observer TIME cited satellite images of the Al-Khadim airbase - published in an IHS Jane Defense report last year in October - located in eastern Libya, as seeming evidence of the deployment of six "Archangel" aircraft, manufactured by Iomax USA, adding that ... Report: US-made military planes are being used in Libya's civil warMilitary Times US-made planes are being used to support a Russian-backed general in LibyaBusiness Insider UAE deploying US-made planes to support rival Libyan authorityThe New Arab all 14 news articles »

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UAE deployed US-made fighter aircraft to eastern Libya forces - The Libya Observer