It was expected that the strategy to clear a global oil glut struck between the OPEC and Russia to succeed within six months. But now it could be years that the battle could last for.
Already nine months later than originally expected, next spring, tBottom of Form
he Organization of Petroleum Exporting Countries and its partners plan to wrap up their production cuts. Yet as world inventories could remain oversupplied even after the end of 2018 as shown by data from the International Energy Agency, oil prices are faltering again. Instead of months, draining the surplus may take years, ESAI Energy LLC predicts.
“They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said in a television interview. “Re-balancing is a stubborn process.”
As the production cuts that OPEC, Russia and other partners started in January fail to disperse a world surplus, oil prices have lost 10 percent in London this year. In order to decide whether further action is needed beyond spring 2018. the producers will meet in November.
As U.S. shale producers prove they can keep drilling despite lower prices and amid recovering output from OPEC members exempt from the deal — Libya and Nigeria, the cutbacks have been undermined. The U.S. government forecasts that shale output will hit a record next month.
As a result, the IEA’s latest report showed on Aug. 11 that higher than the amount needed for most of next year was OPEC’s current production — about 32.8 million barrels a day in July. OPEC would potentially expand it further instead of fulfilling its goal to reduce oil inventories to their five-year average.
And according to consultants ESAI Energy the longer-term outlook also poses problems. ESAI predicts that while growth in oil consumption slows, U.S. production will continue to expand over the next five years. Products derived from gas will meet new demand for petrochemical products, a key driver.
“If OPEC wants to keep oil prices in the $50s and hit $60, the organization will have to keep a lid on supply for several more years,” said Sarah Emerson, energy principal at ESAI in New York.
Still, some signs of success have been shown by the cutbacks by OPEC and Russia. the IEA, which advises most of the world’s major economies on energy policy, said that global inventories declined in the second quarter, bringing them closer to their five-year average. Suggestions that markets are tightening are made by a discount on immediate crude supplies which has turned into a premium.
“The inventory overhang is falling, the re-balancing process is underway,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich. “Stocks are obviously still high, but from a supply-demand perspective we were in deficit in the second quarter.”
Agreeing with the views of some oil company bosses is the prospect of OPEC facing a longer struggle than expected. Better times might not return until the end of the decade, said Weatherford International Plc head Mark McCollum and Total SA Chief Executive Officer Patrick Pouyanne at a conference in Istanbul last month.
(Adapted from Bloomberg)