John Kemp, Reuters

U.S. crude oil production is set to increase by more than 1.2 million barrels per day (MMbbl/d) in 2018 compared with 2017, according to the latest short-term forecasts from the U.S. Energy Information Administration.

U.S. crude production will average almost 10.6 MMbbl/d this year compared with 9.3 MMbbl/d in 2017.

The forecast has been revised sharply higher from less than 10.3 MMbbl/d at the time of the last prediction in January 2018 and 9.9 MMbbl/d in July 2017.

Unexpectedly rapid growth in U.S. onshore production from the Lower 48 states in recent months has caused the agency to re-benchmark its output numbers going forward. Crude production from the Lower 48 excluding federal waters in the Gulf of Mexico, mostly from shale, is expected to rise by nearly 1.25 MMbbl/d this year.

Total U.S. liquids production, which includes natural gas liquids, is predicted to rise by 1.7 MMbbl/d in 2018, which is exactly the same as the forecast increase in global liquids consumption.

If the forecasts prove correct, U.S. shale producers will capture all or most of the predicted growth in global oil consumption this year.

OPEC Quandary

Surging output from shale underscores the growing competitive threat to members of OPEC and its allies led by Russia.

Efforts to restrain production under the cooperation framework between OPEC and non-OPEC allies risk back-firing. The cooperating countries are already conceding market share to the shale producers, in a re-run of the situation before oil prices slumped in 2014.

If production restraint succeeds in drawing down global inventories even further, and pushes Brent significantly above $70 per barrel, the resulting shale surge and slowdown in consumption growth will intensify the danger.

The dilemma between defending prices or protecting market share has been a familiar one for OPEC for the last 40 years, and the organization has regularly alternated between pursuing these competing priorities.

Saudi-led OPEC focused on defending prices before 2014, and then switched to protecting market share between June 2014 and June 2016, before reverting to price defense from December 2016 onwards.

The price defense strategy has worked but is now starting to threaten the organization’s market share and could become counterproductive if carried too far.

Exit Timing

OPEC and its allies need to start planning an exit from their production agreement with the goal of capturing at least some incremental market demand in 2018 and 2019 while preventing another slump in prices.

OPEC is focused on maintaining current production through the end of 2018, although it has promised an interim review at the next ministerial meeting in June.

But maintaining production restraint until the end of the year risks tightening the market too much and inviting another shale surge, which would repeat the events of 2011-2014.

Between 2011 and 2014, OPEC members consistently underestimated the competitive threat from shale until it overwhelmed them.

Maintaining output restraint for too long this time around would repeat the same mistakes that led to the subsequent slump.

OPEC and its allies must choose between an early, smooth and controlled adjustment to the cooperation agreement or risk a later and more disorderly one.