Analysis-With output hikes, OPEC+ again targets US shale oil

By Olesya Astakhova, Dmitry Zhdannikov and Alex Lawler

MOSCOW/LONDON (Reuters) - Behind OPEC+'s plan to ramp up oil output and punish over-producing allies, group leaders Saudi Arabia and Russia are pushing a second objective: taking on U.S. shale production to win back market share from the United States.

OPEC's last price war on U.S. producers 10 years ago ended in failure, as breakthroughs in technology and drilling allowed U.S. shale companies to cut costs, compete at lower prices and in the following years take market share from the 12-member group.

U.S. production is, however, more vulnerable now to a price war. U.S. shale producers have seen costs rise in the past three years. Their income is also falling due to declining global oil prices - linked in part due to the economic fallout from President Donald Trump's tariff policies.

Reuters spoke to 10 OPEC+ delegates and industry sources briefed by Saudi Arabia or Russia on their production strategy.

Retaking some market share is one motivation for a May 3 decision to bring back output more rapidly than previously planned, according to four of the 10 sources, though none said the strategy constituted a price war yet.

To hurt shale producers today, OPEC+ would need to push oil prices lower than their current levels of around $65 per barrel to less than $55-$60, said the sources, all of whom declined to be identified due to the sensitivity of the matter.

"The idea is to put a lot of uncertainty into plans by others with prices at below $60 per barrel," said one industry source briefed on Saudi Arabia's thinking.

The Saudi government communications office, the office of Russian Deputy Prime Minister Alexander Novak and OPEC did not respond to requests for comment.

OPEC+, which includes OPEC members and fellow producers such as Russia and Kazakhstan, cited "the current healthy market fundamentals, as reflected in the low oil inventories" as its reasoning for the production decision.

OPEC+ output hikes, however, also come as the best quality shale areas in the biggest U.S. oilfield, the Permian, have been depleted. As producers move toward secondary areas, production costs are rising. Inflation has added to those costs.

Shale producers now need a price of $65 per barrel on average to profitably drill, according to a first-quarter Dallas Federal Reserve survey of over 100 oil and gas companies in the Texas, New Mexico and Louisiana region.

In contrast, analysts estimate Saudi production costs at $3-$5 per barrel and Russia's at $10-$20.

LAST PRODUCER STANDING

At its peak, OPEC production accounted for over half of global oil. But that dominance has been eroding, falling from a 40% market share just a decade ago to under 25% this year, according to OPEC figures, as the United States' share rose from 14% to 20%.

Together with non-OPEC allies, OPEC+ produces some 48% of global oil.

After cutting production by as much as 5.85 million barrels per day - or 5% of global demand - in the last five years to balance the market while U.S. shale output grew, OPEC+ is now increasing production.

"It is time to return lost market share," one of the OPEC+ sources told Reuters.

Saudi Arabia says its low production costs mean it will be the last producer standing in any competition.

And the sources told Reuters that Moscow has gradually come around to the Saudi strategy to pump more oil to punish OPEC+ members such as Iraq and Kazakhstan for over-production and put others, including shale producers, under pressure.

"The main source of oil market imbalance comes from U.S. shale growth," a high-level Russian source said.

The source added that having the oil price under $60 per barrel - the G7 price cap imposed on Russian oil due to the Ukraine war - would facilitate exports and might suit Moscow.

EVERYBODY HURTS

Global oil benchmark Brent, after trading within a narrow band of $70-$80 a barrel for most of last year, fell to a four-year low near $58 per barrel in April on the OPEC+ output hikes and worries about the global economy.

The timing could not be worse for U.S. producers, said Linhua Guan, CEO of Surge Energy America, one of the largest private U.S. crude producers, with operations in the Permian Basin.

U.S. oil production was already likely to fall this year, as top quality inventory has been drilled out, he said. And the U.S. administration's tariff policies and the resulting volatile market have weighed heavily with bankruptcies expected across the industry, Guan added.

"OPEC+ hiking production is taking market share from U.S. shale producers," he said.

Earlier this month, the U.S. oil and gas rig count fell to its lowest since January, according to Baker Hughes.

Shale firm Diamondback Energy lowered its output forecast for 2025 earlier this month, saying that global economic uncertainty and rising OPEC+ supply have brought U.S. oil production to a tipping point.

And ConocoPhillips warned last week that prices around $50 per barrel could trigger widespread activity reductions, even among larger players.

But price wars hit everyone hard.

Though oil companies come under pressure to cut capital expenditures, jobs and dividends, lower prices put countries that rely on oil revenues under fiscal pressure.

The International Monetary Fund estimates Russia needs oil prices above $77 per barrel in order to balance its budget. For Saudi Arabia, that figure is over $90 per barrel.

OPEC+ does not have a formal price target, but officials do regularly share views on price levels and implications for the industry and the global economy.

In an indication it is prepared for at least some pain, Saudi officials have briefed allies and industry experts that it considers a period of prices at $60 per barrel bearable, even if it has to borrow more to balance its budget.

(Reporting by Alex Lawler, Olesya Astakhova and Dmitry Zhdannikov; Additional reporting by Georgina McCartney, Maha El Dahan, Yousef Saba and Sarah McFarlane; Graphics by Ahmad Ghaddar; Writing by Dmitry Zhdannikov; Editing by Simon Webb and Joe Bavier)