IEA Sees Oil Supply Outside OPEC Falling by Most Since 1992

Oil at $20 a Barrel? Goldman Says It's Possible
  • U.S. shale output to shrink by 400,000 barrels a day in 2016
  • Saudi defense of market share is having `intended effect'

Oil supplies outside OPEC will decline next year by the most in more than two decades as the price rout curbs U.S. shale output, according to the International Energy Agency.

Production outside the Organization of Petroleum Exporting Countries will fall by 500,000 barrels a day to 57.7 million in 2016, the Paris-based adviser said Friday in its monthly report. While fuel demand this year will be the strongest since 2010, record-high oil inventories in developed nations won’t start to diminish until the second half of next year, and the revival of Iranian exports with the removal of sanctions may swell supplies further, it said.

Shrinking supplies outside OPEC show that Saudi Arabia’s strategy to defend the group’s market share by pressuring rivals with lower prices “appears to be having the intended effect,” the IEA said. Brent crude futures, a benchmark used around the world, slumped to a six-year low near $42 a barrel on Aug. 24. Production may not be falling fast enough to clear the global surplus and prices could drop as low as $20, according to Goldman Sachs Group Inc.

“The big story this month is one of tightening supply,” said the agency, which advises 29 nations on energy policy. “The lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand.”

U.S. shale output will shrink by almost 400,000 barrels a day next year as futures contracts for 2016 trade below the price needed for most projects to break even, the agency said. As recently as July, the IEA had projected that U.S. shale supply would expand by 60,000 barrels a day in 2016.

The decline in total non-OPEC supply next year will be the biggest since a drop of 1 million barrels a day in 1992 following the collapse of the Soviet Union, it said.

Shale Shrinkage

As a result of the projected drop in non-OPEC output, the amount of crude needed from OPEC next year will increase by 1.6 million barrels a day to 31.3 million. That’s still less than the 31.57 million daily barrels the organization’s 12 members pumped in August. Their output slipped by 220,000 barrels a day last month because of lower production in Saudi Arabia, Iraq and Angola, according to the report. High-cost projects in the group are “at risk” because of the price slump, the agency estimated.

For more, read this QuickTake: Oil Prices

U.S. output will need to decline by 585,000 barrels a day next year and other non-OPEC production will need to fall by 220,000 barrels a day for the global surplus to end by the fourth quarter of 2016, Goldman said.

Global oil demand will climb by 1.7 million barrels a day this year to 94.4 million as low prices stoke consumption, before growth eases in 2016 to 1.4 million barrels a day. China, the world’s second-biggest oil consumer, will “keep up its purchases” even as signs of slowing growth and the country’s surprise devaluation of its currency fan concerns about its economic stability, the IEA said.

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