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EIA cuts 2018 production outlook

It could be bad news for Opec's attempts to lift the oil price

For Opec, this month's Short-Term Energy Outlook from the US Energy Information Administration (EIA) was a mixed bag-some good, but mostly bad, news. The good? Lower prices are taking some steam out of American oil-production growth, believes the EIA. The bad? The slowdown won't show up until next year, and is smaller than the producer group would hope.

The July report held its 2017 average production figure steady at 9.3m barrels a day, up from 8.9m b/d last year. But the EIA cut its outlook for 2018 by 100,000 b/d compared with last month's report to 9.9m b/d-still a record year for US output. The agency cut its price expectation for next year by $4/b to $52/b.

The takeaways from the report? First, the huge run up in the rig count over the past nine months, and new Gulf of Mexico projects now ramping up, have baked in strong output growth through the end of 2017. The EIA predicts US supply will surge by nearly 0.6m b/d over the second half of the year, compared with growth of less than 200,000 b/d in the first half. A steady stream of strong production growth figures will weigh on investor sentiment, which has turned deeply bearish.

More worrying for Opec, and price bulls, is the growing evidence that even at relatively low prices shale output continues to grow quickly. EIA forecasts show tight oil doing most of the heavy lifting in 2018's output growth, with output up nearly 400,000 b/d year on year, while Gulf of Mexico production provides the other 200,000 b/d of annual growth.

The pace of this increase, though, could vary significantly even with small changes in the oil price. Analysts at Bank of America Merrill Lynch, an investment bank, reckon that within the $45-55/b price band, each dollar move in the price translates into a 100,000-b/d change in US oil supply. At $55/b, the bank would expect 2018 year-on-year supply growth of 1.1m b/d, but that falls to just 200,000 b/d at $45/b.

If that proves true, the risk to Opec's plans to lift the oil price is clear. Even an attempt to "shock and awe" the market with a new round of deep production cuts would quickly be blunted by rapidly rising US supply.

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