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Rystad Energy comments on OPEC

Hydrocarbon Engineering,

The response from OPEC today is about more than stemming a decline in oil prices. It’s about OPEC’s role as the stabilising factor in the oil market and future relevance as an organisation. Surging US shale oil supply and weak global demand prospects will cause an increasingly severe over-supply situation ahead. Global stock builds average more than 2.2 million bpd in the first half of 2015 and a tremendous 1.6 million bpd for 2015 as a whole. The supply-demand imbalance is structural and could persist. Without any adjustments to supply, oil inventories would implicitly build by an average 1.8 million bpd until 2020, which in reality is impossible. Markets must adjust. US shale oil production will grow by 1.1 million bpd next year, even at current oil prices and no assumed growth in horizontal rig count. Additions from the US outpace global demand in the next two years and other non-OPEC projects under development will add to the supply over-hang.


OPEC faces a dilemma. A voluntary cut in supply will support oil prices and likely improve member countries’ revenue. However, it will also ensure strong growth from US shale drillers and other competing producers while reducing OPEC’s market share in the medium term.

OPEC is currently producing 0.6 million bpd above their collective output target of 30 million bpd. If there is no change in the output target, it could indicate a paradigm shift. Market forces would work to restore oil market balance for the first time in decades. Prices will likely continue to slide next year as the market realises that the price level where US shale production growth stops is lower than US$60/bbl WTI.

If OPEC reduces the output target to 29.5 million bpd or less, the market will likely stabilise but only if it is followed by immediate signs of actual output cuts. An implied cut of 1.1 million bpd from current production levels, would be seen as a compromise. Helped by non-OPEC producers market balance should be restored but not create much upwards pressure on prices. A cut to 29.0 million bpd would be needed to send prices higher next year.

Written by Bjørnar Tonhaugen, VP Oil & Gas Markets, Rystad Energy.

Adapted for web by Cecilia Rehn.

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