EIA piece
American oil producers will be forced to make drastic cuts in 2016 because of stubbornly low crude prices, an influential energy monitor said Friday, giving Saudi Arabia a chance to regain some of its lost clout in global markets.
Oil prices that last month reached their lowest levels since the financial crisis have "dimmed the prospects for a recovery in U.S. drilling activity," the International Energy Agency said in its closely watched monthly oil market report. The agency said tight oil--a type of expensive-to-pump crude that has driven American production in recent years--would decline by 400,000 barrels a day in 2016, a fall that already began in July.
Along with expected drops in Russian and North Sea output in 2016, production outside of the Organization of the Petroleum Exporting Countries could see the steepest cuts since the fall of the Soviet Union , the IEA said.
The agency's predictions are among the gloomiest for American oil production to emerge since U.S. crude prices crashed last month to less than $40 a barrel for the first time since the financial crisis, before recovering to about $ 45 a barrel. But U.S. government forecasters this week also predicted a sharp drop in American oil output over the coming 12 months, before beginning to rebound next fall.
With the rise of hydraulic fracturing techniques to extract crude from shale formations in recent years, the U.S. had become one of the world's top three oil producers, along with Saudi Arabia and Russia . Newly low oil prices present challenges to U.S. producers who had shown unexpected resiliency when the market collapsed last year, the IEA said.
"U.S. oil production is likely to bear the brunt," said the Paris -based agency, which advises some of the world's largest oil consumers.
And the IEA noted that any U.S. decline could give OPEC --led by Saudi Arabia , the world's largest crude exporter-- more leverage over the market in 2016. The producer group may boost its output next year as a result, the IEA said.
OPEC last year abandoned its role of slashing production to prop up prices, reasoning that the world was so oversupplied with oil that its cut wouldn't make a difference and would allow other producers to swoop in and steal its market share. The new strategy sent prices even lower, with OPEC hoping that higher-cost producers would be forced to cut back.
That didn't happen right away, but the most recent price crash last month has changed the equation, the IEA said.
"The lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand," the IEA said. "On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, 'inefficient' production."
Crude oil was trading lower in London on Friday. Brent crude, the international benchmark, and U.S. oil were both down about 2%, at about $48 and $45 a barrel, respectively as investors continued to worry about an oversupply that the IEA put at 2 million barrels a day.
Global oil prices have been rocked in the past year, falling from more than $114 a barrel for Brent crude, the international benchmark, in summer 2014.
The turmoil generally has been a boon for consumers, as gasoline prices have fallen to their lowest levels since the financial crisis. According to the U.S. Energy Information Administration , average American retail gasoline prices were $2.44 a gallon this week. From 2011 to 2014, when crude prices were routinely $100 a barrel or more, gasoline cost between $3 and $4 a gallon on average, according to the EIA.
Those prices have driven consumer demand higher, the IEA said. Global oil demand growth is expected to climb to a five-year high of 1.7 million barrels a day in 2015, and demand will the rise by 1.4 million barrels a day in 2016, the agency said. The agency raised its oil-consumption forecasts by about 200,000 barrels a day for this year and the next.
Even with higher demand and falling supplies in the U.S. and other non- OPEC countries like Russia , prices could remain low through 2016, Goldman Sachs said Friday. The investment bank lowered its 2016 forecast for Brent to $49.50 a barrel, down from $62 , and for WTI to $45 a barrel, down from $57 . It said prices may have to fall as low as $20 a barrel to clear the huge surplus in global markets.
The IEA said low prices had caused the number of active rigs in the U.S. to resume its decline in September, now standing nearly 60% lower than a year ago. The cost cuts are magnified by the fact that many tight oil wells require intensive investment. The agency said that close to a million barrels a day of oil was at risk of being shut if prices remained at $45 a barrel.
If prices remain low and American supply is crimped, the IEA said lower-cost OPEC producers--most of them in the Persian Gulf--"would need to turn up the taps during the second half of 2016 to keep the market in balance." The agency, which represents the view of oil consumers, tends to voice bullish views on needs for OPEC crude.
The IEA said demand for OPEC oil would rise to 32 million barrels a day in the second half of next year--the highest in seven years--more than the 31.6 million barrels a day the group produced in August and much more than the group's target of 30 million barrels a day.
After reaching a three-year high in July, OPEC's crude output fell by 220,000 barrels a day in August due to disruptions in Iraq and lower fuel demand in Saudi Arabia , the IEA data shows.
Write to Benoît Faucon at benoit.faucon@wsj.com
(END) Dow Jones Newswires
09-11-15 0954ET
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