Tuesday, February 23, 2016 5:16 am
Any appreciable price gain that is expected to follow OPEC and non-OPEC producers deal to freeze output, will be undermined by US shale producers, the secretary general of OPEC, Abdullah al-Badri has warned. And this may prolong the oil price doldrums.
Al- Badri painted the bleak scenario at the IHS CERAWEEK conference in Houston, United States, cautioning on the expectations of output freeze.
In his view, when oil prices recover from their current levels in the mid-$30 per barrel to around $60 per barrel, shale producers would quickly start drilling again, capping any gains.
“I don’t know how we are going to live together,” Badri said of the once booming shale oil sector. “If prices will go up in 2017 or 2018, the price rally will be capped by U.S. shale oil. That’s what is different this time.”
Last week, some of the world’s biggest oil producers including Russia, Brazil, China, Oman and Mexico reached an understanding with OPEC on a possible output freeze.
Badri said if the freeze holds for several months, it is just the first step.
He said there are “other steps”, such as production cut to eliminate a persistent global oversupply.
Al-Badri admitted the oil cartel had not expected prices to fall so sharply since the group decided in late 2014 not to cut output in the face of rising global supplies, fueled in large part by the fast growth of the U.S. shale production.
“This cycle is very nasty,” Badri said.
“Let us freeze production… If this is successful we can take other steps in the future,” Badri said. Parties must first manage to cap output levels for three to four months, he added.
Global production exceeded demand by as much as 2 million barrels per day last year. A gradual decline in output due to lower investment is expected to balance the market in early 2017, according to the International Energy Agency.
However, a huge build in global oil inventories, which Badri said has reached 350 million barrels, means it will take longer for prices to recover.
Badri was confident that OPEC still has a vital role in the global oil market.
“We are not dead. We are alive and alive and alive for many years more,” he told reporters.
But he underlined that understanding between OPEC and non-OPEC producers is increasingly necessary to balance the market.
Addressing a room filled with hundreds of global oil executives, Badri said he was willing to speak with U.S. officials about the collapse in oil prices.
The rout in prices of more than 70 percent in 20 months, is not the same as oil’s previous boom-bust cycles, he said.