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OPEC's Strategy Could Backfire, IEA Warns

OPEC’s decision to abandon its strategy of controlling oil production to support prices could contribute to a sustained period of low crude prices and dent the group’s own revenues, the International Energy Agency said.
ENLARGE

OPEC’s decision to abandon its strategy of controlling oil production to support prices could contribute to a sustained period of low crude prices and dent the group’s own revenues, the International Energy Agency said.


Photo:

Eric Gay/Associated Press

By

Sarah Kent and

Benoît Faucon

Updated Nov. 9, 2015 8:05 p.m. ET

OPEC’s unwillingness to limit its oil output could help usher in a sustained period of low prices and more pain for its members’ budgets, the International Energy Agency said Tuesday.

The comments by the Paris-based monitor of energy trends echoed criticism from within and outside the group over a Saudi-led strategy of keeping the taps open to put pressure on higher-cost rivals such as the U.S.

Members of the Organization of the Petroleum Exporting Countries including Venezuela, Iran and Algeria are being badly pinched by fallen oil prices and have agitated for production cutbacks to push them back up.

Oil producers that aren’t members of the group are complaining as well: On Monday, Omani oil minister Mohammed Bin Hamad Al Rumhy called current oil production levels “irresponsible” and said the group had contributed to low oil prices.

“This is a commodity that if you have 1 million barrels a day extra in the market, you just destroy the market,” Mr. Rumhy said. “We are hurting, we are feeling the pain and we’re taking it like a God-driven crisis. Sorry, I don’t buy this. I think we’ve created it ourselves.”

The IEA made its comments in a summary of its World Energy Outlook, an annual, book-length report on the state of the energy industry, from crude oil to utilities to renewables.

The debate comes as OPEC is lining up for a potentially contentious meeting Dec. 4 in Vienna. Saudi Arabia, the group’s leader, has signaled it won’t allow a change in strategy, arguing production cuts can’t affect the market like they used to before the surge in U.S. output.

The approach is having an effect: U.S. production has dropped in recent months, hit hard by oil prices that have fallen to less than $50 a barrel.

But it also comes at a cost. Many large investment banks and oil companies are now predicting oil prices at around $60 a barrel in 2016—far lower than needed to balance the budget. in some oil-producing countries, including Saudi Arabia. They also come as some Middle Eastern national oil companies are delaying projects to save money

December futures fell 42 cents to $43.87 in New York Monday, extending a four-session losing streak that has left prices down 8.4%. Brent, the global benchmark, fell 23 cents to $47.19.

On Tuesday, the IEA said “a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market mix” could, among other factors, could keep the price of benchmark Brent crude around $50 a barrel through the end of the decade. OPEC’s oil export revenue would be 25% lower at those prices than it would be under a more bullish scenario in which oil rebounds to $80 a barrel by 2020. The IEA said the $80 scenario was more likely.

OPEC’s Persian Gulf producers on Monday defended their decision to pump full throttle to keep their share of the market.

Suhail al Mazrouei, the United Arab Emirates’ top oil official, said production cuts would simply subsidize higher-cost producers in the U.S. and elsewhere. Oil in the U.A.E., Saudi Arabia and other Middle Eastern producers is fairly cheap to produce.

“When you are the least expensive oil, you should be the base producer,” Mr. Mazrouei said.

The IEA said an expected boost in production from Iraq and Iran faces significant uncertainties because of political and investment risks. The agency also said U.S. production—with “its ability to respond quickly to price signals”—“is changing the way the oil market operates,” but its rise will be constrained because wells drilled in shale formation are depleted quickly.

The IEA said Tuesday that American shale-oil production will recover and grow to a peak of 5 million barrels a day in 2020.

Write to Sarah Kent at [email protected] and Benoît Faucon at [email protected]

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