To hear OPEC ministers in Vienna last week, one would think the cartel's battle for market share is a complete success and oil prices are now firmly anchored where they are.

"The strategy is working... It will take time for markets to rebalance," was the mantra from OPEC kingpin Saudi Arabia's oil minister Ali al-Naimi and his peers.

However, the oil markets have probably become even less easier to read now than in November last year when OPEC launched its shock strategy of adding barrels to the already oversupplied market in the hope of winning back market share from higher-cost rivals such as U.S. shale oil.

If anything, the list of uncertainties that could pull oil prices both ways from OPEC's current favorite price range of $60-$70 per barrel has grown longer.

It includes the performance of the U.S. oil industry, the return of Iran to oil markets, demand growth in China, very tight spare oil capacity in Saudi Arabia and finally a possible return of a political oil risk premium - as illustrated this weekend by a rocket attack on Saudi Arabia.

"If prices go back to $70 per barrel, U.S. production goes back. Meanwhile if China's stockpiling slows, we will all of a sudden have a very oversupplied market," said Jamie Webster, a senior director at IHS Energy and a long-time OPEC observer.

U.S. rig count has seen a spectacular decline in the past months as companies cut investment. But it has so far failed to translate into a deep production decline.

Predictions of future U.S. output performance range from the very pessimistic by BP's former chief Tony Hayward, to a message from ConocoPhillips' boss that U.S. shale "is here to stay", which Ryan Lance delivered in person to OPEC last week during a two-day seminar in Vienna.

The idea of U.S. shale oil being now a perennial problem, with wells switched on and off depending on prices and production costs becoming increasingly cheaper every time fracking technology makes an advance, is something that will hugely complicate OPEC's calculations in the future.

There might be something even worse.

"Make no mistake. This (fracking) technology will be replicated elsewhere around the world," the head of the West's energy watchdog, the International Energy Agency, Maria van der Hoeven, told the OPEC seminar last week.

CHINESE DILEMMA

While the prospects of China producing its own huge quantities of shale oil are remote, those of Chinese demand surprising on the downside or upside this year are greatly under-estimated.

If anything, Saudi Arabia believes its strategy is working, mainly thanks to impressive oil demand growth which can help rebalance the oversupplied market.

"We need to understand the dilemma of hidden demand in China, where you have two types of demand - normal demand and strategic stockpiling. The latter won't last forever," said Webster.

U.S. and European demand have also surprised on the upside with the old continent showing a spectacular spike in diesel demand of 7 percent in the first quarter. But it is still not clear how long it could last.

David Fyfe, the head of research at trading house Gunvor, said a nearing nuclear deal between the West and Iran was probably the greatest unknown for OPEC.

With estimates ranging between zero and as much as one million barrel per day of extra Iranian oil supply next year, OPEC may confront yet another period of weaker oil prices, which some poorer members can barely afford.

"OPEC will have to start looking at production discipline again," said Fyfe.

"ZERO RISK PREMIUM"

Gary Ross, another veteran OPEC watcher and the founder of PIRA think-tank, said he believed the market was moving in OPEC's favor as slowing investment would tighten supply.

"The market is broken – not only are short-term prices too low, but so are long-term prices. They are signaling that the world doesn't need more supply. Over time, the market is going to tighten," he said.

One of the best known oil market bulls, the head of Astenbeck Capital Andy Hall, said in a letter to investors he believed global demand growth this year will likely come in closer to 2 million bpd rather than the 1 million "being predicted by the principal forecasting agencies".

Meanwhile, as Saudi Arabia burns more crude at home to meet peak summer demand for air conditioning, its spare capacity will essentially fall to zero, Hall said. "Yet the geo-political risk premium in the oil price today is zero at best".

Source: www.reuters.com

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