London: Organisation of Petroleum Exporting Countries' (Opec) likely decision to leave quotas unchanged next week belies the growing prospect of having to make the deepest oil-production cuts since 2009 as a global supply surge threatens to weaken prices.
The Opec may need to lower output by 1 million barrels a day, or 3 per cent, in the first half of next year, according to Societe Generale. Brent crude may drop 20 per cent by June if the group doesn't reduce the amount it pumps, the Centre for Global Energy Studies said.
The pressure on Opec shows how the energy boom in the United States is contributing to the biggest annual accumulation of inventories since 2008 and eroding the group's influence just as members seek to bolster their economies and quell domestic political discontent. At the same time, Iraq, the second-biggest Opec member, is embarking on plans to more than double capacity nine years after the US-led invasion all but froze output.
"There is a danger if Opec doesn't do anything that prices may collapse," said Nordine Ait-Laoussine, who was oil minister for Algeria, an Opec member, in 1991 and 1992 and now runs Nalcosa, a Geneva-based consultant. "The inventory overhang is just untenable. Next year, we have more exports from Iraq, so the overhang may be exacerbated."
Brent oil fell to $107.03 a barrel yesterday, the lowest close since November 7 on London's ICE Futures Europe exchange. It has dropped 17 per cent from the 2012 peak of $128.40. The benchmark for more than half of the world's crude may sink to $88 a barrel by June if Opec fails to act, said Leo Drollas, chief economist at the London-based CGES, which was founded by former Saudi oil minister Sheikh Ahmad Zaki Yamani in 1990. Brent will average $110 in 2013, according to the median of 40 analyst forecasts in a survey.
Opec's 12 members have pumped an average of 31.6 million barrels a day this year, the most since 2008 on an annual basis, according to data. All 18 analysts surveyed by Bloomberg from November 29 through December 4 predicted the group will reaffirm its output ceiling of 30 million barrels a day when ministers meet in Vienna on December 12.
The US is producing oil at the fastest rate in almost two decades as horizontal drilling and hydraulic fracturing, known as fracking, unlock resources in North Dakota, Texas and Oklahoma. The nation pumped 6.8 million barrels a day in the week to November 23, the most since February 1994, according to the Energy Department.
The country, which bought 21 per cent of Opec's exports last year, produced more than 83 per cent of its own energy in the first eight months of this year, on course to be the highest annual level since 1991, department data show.
"There's been all this talk, most of it longer term, of what does the U.S. shale revolution mean for Saudi Arabia and Opec," said Mike Wittner, head of oil-market research for the Americas at Societe Generale in New York. "Next year is the first time the Saudis need to deal with that. Opec has some serious cutting to do."
Saudi Arabia, which produces almost three times as much oil as Iraq, needs a price of about $95 a barrel to cover its budget requirements, according to the CGES. Other Opec nations need even higher prices, it estimates. "If they don't do anything prices will sag and then fall heavily," said Drollas, who estimates the group would need to curb production by 2 million barrels a day by the middle of next year unless it acts.
Oil inventories held by companies in the world's most industrialized nations, which make up the Organisation for Economic Cooperation and Development, increased by 124.8 million barrels, or 4.8 per cent, in the nine months through September, according to data from the International Energy Agency.