Saudi strategy will squeeze US shale: IEA

(MENAFN- The Peninsula)

Paris: Cheap oil prices ushered in by Saudi Arabia’s policy of protecting its market share will end up squeezing high-cost producers like US shale drillers who next year may face the biggest drop in output in nearly a quarter century the IEA said yesterday.

Cheap fuel is also hooking consumers with oil demand growth set to hit a five-year high this year the International Energy Agency said in its monthly report.

The oil market has been driven for the past year and half by an increasingly transparent policy by Opec oil cartel kingpin Saudi Arabia to safeguard its influence against upstart shale producers who could change global dynamics by cutting US dependence on imported oil.

High crude prices of over $100 per barrel in 2013 were allowing US shale producers to exploit costly technology to extract previously unreachable oil and sharply increase supply in the top oil-consuming nation.

But with Saudi Arabia and its partners in the Organisation of Petroleum Exporting Countries refusing to cut production crude oil prices slumped to six-year lows last month with the main US oil contract dropping to below $40 at one point.

The IEA a Paris-based institution which analyses energy markets for advanced oil-consuming nations said the industry was now beginning to react to lower prices by cutting output.

“US oil production is likely to bear the brunt of an oil price decline that has already wiped half the value off” the main international oil contract the IEA said in its report.

“After expanding by a record 1.7 million barrels per day in 2014 the latest price rout could stop US growth in its tracks” it added.

The IEA forecast non-Opec oil output may drop by half a million barrels per day next year — the biggest decline in 24 years — with US shale producers accounting for four-fifths of that drop.

“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” said the IEA.

While it had previously expected US shale output to rebound next year the IEA said “the latest price rout takes 2016 futures prices below the average breakeven cost for all major shale plays” and as such “the current slump in drilling and completion rates is expected to extend well into next year”.

US oil output has until recently held up fairly well against the drop in prices although the sector has cut back drilling and laid off tens of thousands of workers.

But it fell for the fifth week in a row in the week to September 4 dipping to the still relatively high 9.14 million barrels per day according to information released on Thursday by the US Department of Energy.

The IEA noted that the low prices were hurting not only US producers but those in Russia and the North Sea as well. Low prices were also putting high-cost projects in Opec countries at risk it added.

And the gambit has not been without wider risks for Opec countries whose public finances have been pummelled as the price of their main revenue source plunged.

Opec countries have had to tighten their belts with even Saudi Arabia announcing at the weekend it will cut spending and issue more bonds as it faces a record budget shortfall due to falling oil prices. The International Monetary Fund forecasts the Saudi deficit will swell to $130bn this year up from $17.5bn last year which was only the kingdom’s second since 2002.

The IEA doesn’t forecast oil prices however a report yesterday by Goldman Sachs investment bank said they could fall as low as $20 per barrel before clearing out the supply glut.

AFP