OPEC Says Shale Drillers First Affected by Oil-Price Drop

Shale oil drillers will be hurt by the fall in crude prices before members of OPEC because their costs are higher, according to the group’s Secretary-General.

As much as 50 percent of tight oil output will be “out of the market” at current prices, while the Organization of Petroleum Exporting Countries is not in a critical situation, Abdalla El-Badri said at the Oil & Money conference in London today.

“First of all, will be the tight oil” affected by the drop in prices, El-Badri said. “If prices stay at $85, we will see a lot of investment, a lot of projects, a lot of oil going out of the market.”

Crude collapsed into a bear market this month as Saudi Arabia and other producers deepened price discounts for their oil. Global supplies are rising as the U.S. pumps the most oil in almost three decades and Russia’s output nears a post-Soviet record. While U.S. shale-oil producers say they can still make a profit at $80 a barrel, banks including Barclays Plc predict crude will rebound above $100 next year as output slows.

Front-month Brent crude futures, the global benchmark, fell 25 percent from their peak this year on June 19 to trade at $86.95 a barrel on the ICE Futures Europe exchange in London at 11:49 a.m. This plunge does not accurately reflect the balance between oil supply and demand, El-Badri said.

“We see that demand is still growing, that supply is also growing, but the magnitude in the increase in supply does not really reflect this 25 percent change in the market,” he said. “Unfortunately everybody is panicking.”

Shale Growth

Current prices are low enough to slow some drilling for shale oil in the U.S., Paul Horsnell, head of commodities research at Standard Chartered Plc, said by e-mail yesterday. A lack of new sources of production would eventually drive prices up until exploration becomes profitable again, according to Eugen Weinberg, head of commodities research at Commerzbank AG.

If oil remains between $80 and $100 a barrel U.S. shale oil producers will be fine, according to David Lesar, chairman and chief executive officer of Halliburton Co., the world’s biggest provider of fracking services.

OPEC must be ready to raise production because “whatever the price,” tight oil output will peak between 2019 and 2020, El-Badri said. “From that period, OPEC must be ready to produce about 40 million barrels a day of oil.”

OPEC, which supplies about 40 percent of the world’s oil, will need to produce between 29 million and 30 million barrels of oil a day next year to satisfy demand, compared with production of about 30 million currently, he said.

OPEC is next due to meet to review its production target on Nov. 27 in Vienna. The current target of 30 million barrels a day has been in place since January 2012.

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