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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.

HFI Research

If you find our oil market analysis insightful, please visit HFI Research for more detailed fundamental analysis on the oil markets along with in-depth energy equity research.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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