OPEC Must Rethink Plans as $60 Oil Brings New Glut, IEA Says

OPEC and other petro-states need to “reconsider” their output plans due to a fresh wave of U.S. shale oil, the head of the International Energy Agency said.

The warning followed a new forecast that could make uncomfortable reading for the cartel. The production cuts that helped lift oil prices above $60 a barrel are also unleashing a supply surge from non-OPEC rivals including Brazil and Canada, which will cover all growth in global demand until 2020, the IEA said.

“Established producers need to reconsider their production plans quickly and substantially in light of the huge production increase from U.S. shale,” the agency’s Executive Director Fatih Birol said Monday on the sidelines of the CERAWeek by IHS Markit conference in Houston. Asked whether he was referring to OPEC nations, Birol said: “All OPEC producers are established producers.”

The Organization of Petroleum Exporting Countries and allies including Russia, Mexico and Kazakhstan agreed to cut production in late 2016 in an effort to clear a glut in crude inventories. They defied the skeptics by going deeper than their pledged curbs and maintaining them for long enough to deplete the bloated stockpiles.

Yet the strategy has also backfired by unleashing “a new wave of growth from the U.S.” that leaves little space for OPEC to increase output once the cuts expire at the end of the year, according to the agency’s report.

The U.S. will dominate global oil markets for years to come, satisfying 80 percent of global demand growth to 2020, the IEA said. Supplies from other non-OPEC nations will make up the rest.

By 2023, total U.S. liquid hydrocarbon output will rise to 17 million barrels a day from 13.2 million last year. That forecast is based on a Brent crude price of $58, so may be revised even higher if futures remain around current levels of $65 a barrel, Birol said.

“I can tell you our expectations may well need to be revised upwards if prices are higher than we assumed,” Birol said.

In another ominous sign for OPEC, the IEA report noted that production from mature oil fields around the world isn’t declining as fast as before, as lower costs help producers operate more efficiently.

Nonetheless, the head of the IEA, which advises industrialized countries on energy policy, walked a fine line between highlighting the big increase in short-term supplies and the longer-term danger of a shortage. Birol said oil companies were “absolutely not” investing enough in future production, with the potential for demand to overtake supply in the late 2020s.