OPEC sees global flow of oil squeezed harder in 2016

HOUSTON — Collapsing crude prices could squeeze a lot more oil out of the market this year than previously believed, the Organization of Petroleum Exporting Countries said Monday.

In its monthly oil market report, OPEC predicted the oil bust will force global non-OPEC output to sink by 660,000 barrels a day this year, a 69-percent downward revision of its prior monthly forecast. Outside the 13 OPEC nations, the United States is set to see the steepest production declines later this year as domestic shale drillers trim oil spending by 40 percent compared to 2014 levels.

“Tight crude producers (in the United States) are aware that the typical oil wells in shale plays decline 60 percent annually and that the loss is recouped only by drilling new wells,” OPEC said. “As drilling subsides due to high costs and a potentially sustained low oil price, production can be expected to follow, possibly late in 2016.”

Also, crude prices have so low that production in Canada, the North Sea, Latin American and some of Asia has become “vulnerable,” OPEC said.

“2016 will be a supply-driven market,” OPEC said. “It will also be the year when the rebalancing process starts.”

The consultancy Rystad Energy estimates the oil industry has put off 4.2 million barrels of oil equivalent a day in future production while Wood Mackenzie says $380 billion in projects have been scrapped. Tudor, Pickering, Holt & Co. says the canceled projects will delay 5 million barrels a day by 2020.

“The capital intensive, long-cycle nature of megaprojects forces the (integrated oil companies) to be long-term planners, but they have been thrown by the recent volatility in oil markets,” OPEC said.

Royal Dutch Shell on Monday said it has canceled plans to develop gas reservoirs in Abu Dhabi, as the project “does not fit with the company’s strategy, particularly in the economic climate prevailing in the energy industry.”

But there are still projects coming online this year, and OPEC expects those to draw 2 million barrels of oil a day in new production. Anadarko Petroleum Corp., for example, recently announced it has brought on the first barrels of oil from its large Heidelberg project in the Gulf of Mexico. The Heidelberg spar has the capacity to produce 80,000 barrels a day.

OPEC’s report helped stabilize oil prices on Monday after an initial drop further into sub-$30 a barrel territory. The price decline was a reaction to the West lifting economic sanctions against Iran over the weekend, implementing the nuclear deal that had been set last summer. Though Iran reiterated it will try to put 500,000 barrels a day back into circulation this year, it’s a third lower than OPEC’s new forecast for the decline in non-OPEC output.

Crude output within OPEC fell by 210,600 barrels a day in December as Saudi Arabia, Nigeria and Iraq curbed production, according to estimates by secondary sources. Iraq told OPEC its output grew by 383,000 barrels a day.

But signs of oil-supply reductions come as China and other emerging markets face an economic slowdown. OPEC projects global demand growth will slip by 18 percent this year even as crude produced outside of OPEC slides 1.2 percent to about 56 million barrels a day.

The Federal Reserve’s move to raise interest rates in December has also kept crude prices under pressure as the value of the dollar rises against other currencies. Crude is traded in dollars, and when the dollar rises, oil becomes more expensive for foreign buyers.

Investors had pulled capital out of emerging markets for months before the Fed raised interest rates, sinking currencies and boosting inflation to the point that manufacturing activity began to decline in China and elsewhere. And that has slowed crude demand growth, OPEC said.

But the cartel argued a higher-valued dollar is also putting more oil projects out of reach, and that could eventually help ease the world’s oversupply of crude. And loose monetary policies in Europe and Asia could help support demand.

“If the financial industry is able to channel the global liquidity made available by ongoing monetary stimulus programs into the real economy of various countries, this should lead to a broader improvement in the world economic outlook,” OPEC said. “This in turn would result in an improving world oil supply-demand balance over the medium-term.”

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About The Author

Collin Eaton joined the Houston Chronicle's team of energy reporters in 2013, after covering the financial industry for another publication. He writes mainly about U.S. oil companies and developments in international oil markets.