OPEC to Struggle With Oversupply for Years

OPEC to Struggle With Oversupply for YearsOPEC to Struggle With Oversupply for Years

When OPEC and Russia first embarked on clearing a global oil glut, it was expected to succeed within six months. It now looks like the battle could last for years.

The Organization of Petroleum Exporting Countries and its partners plan to wrap up their production cuts next spring, already nine months later than originally expected. Yet oil prices are faltering again as data from the International Energy Agency show world inventories could remain oversupplied even after the end of 2018, Bloomberg reported.

ESAI Energy LLC, a US-based energy market research firm, predicts that rather than months, draining the surplus may take years.

“They’re going to have to dig in for the long haul,” Neil Atkinson, the head of IEA’s oil markets and industry division, said in a Bloomberg television interview. “Rebalancing is a stubborn process.”

Oil prices have lost about 10% in London this year as the production cuts that OPEC, Russia and other partners started in January fail to disperse a world surplus. The producers will meet in November to decide whether further action is needed beyond spring 2018.

The cutbacks have been undermined amid recovering output from OPEC members exempt from the deal—Libya and Nigeria—and as US shale producers prove they can keep drilling despite lower prices. Shale output will hit a record next month, the US government forecasts.

As a result, OPEC’s current production—about 32.8 million barrels a day in July—is higher than the amount needed for most of next year, the IEA’s latest report showed on Aug. 11. Instead of fulfilling its goal to reduce oil inventories to their five-year average, OPEC would potentially expand them further.

The longer-term outlook also poses problems, according to ESAI Energy. Over the next five years, US production will continue to expand while growth in oil consumption slows, ESAI predicts. New demand for petrochemical products, a key driver, will be met by products derived from gas.

“If OPEC wants to keep oil prices in the $50s and hit $60, the organization will have to keep a lid on supply for several more years,” said Sarah Emerson, energy principal at ESAI in New York.

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