IEA: OPEC Battle for Oil Market Share Just Beginning

Source: By Sarah Kent, Wall Street Journal • Posted: Thursday, May 14, 2015

LONDON—A global battle for market share between OPEC and non-OPEC producers that has rocked oil markets and fed into the biggest price slump since the financial crisis is just getting started, the International Energy Agency said Wednesday.

Oil prices have plunged since June amid a glut in oil production driven by booming U.S. output and sluggish demand, a combination that threatened the market position of some of the world’s largest oil producers.

It sparked a struggle for market share, marked by the Organization of the Petroleum Exporting Countries’ decision not to cut production in the face of falling prices. The controversial strategy, launched at the group’s last meeting in November, lubricated the decline in oil prices and sent a strong signal that the producer group wouldn’t prop up the market on behalf of its competitors.

In its closely watched monthly oil market report, the IEA said that the producer group’s tactic is working to some extent. U.S. shale oil producers have undergone months of cost-cutting that has halted their relentless increase in production. The IEA expects U.S. shale oil output growth to slow by 80,000 barrels a day this month.

However, other non-OPEC producers continue to ramp up production. Russia’s output jumped an unexpected 185,000 barrels a day year-on-year in April and Brazilian production was up 17% in the first quarter, the IEA said. Meanwhile, production in China, Vietnam and Malaysia has also shown persistently strong growth. The IEA expects Chinese oil production to increase by 100,000 barrels a day this year to 4.3 million barrels a day. A recent rally in oil prices could also give U.S. shale oil producers a fresh lease on life.

“It would thus be premature to suggest that OPEC has won the battle for market share. The battle, rather, has just started,” the IEA said.

In its Wednesday report, the Paris-based energy watchdog raised its forecast of 2015 non-OPEC production growth by 200,000 barrels a day to 830,000 barrels a day.

The two reports set the scene ahead of OPEC’s next semiannual meeting in June. At the closely-watched gathering, ministers from the member countries will meet to discuss the oil market and whether OPEC should adjust its production to influence its direction. This time, the meeting will include backroom discussions with non-OPEC members like Russia. Saudi Arabian and OPEC officials have indicated in the past that they might consider cutting production if other large non-OPEC producers would do so too.

So far though, the producer group shows no signs of departing from its current strategy. Its output rose to 31.2 million barrels a day in April, its highest level since September 2012 and an increase of 1.4 million barrels a day compared with a year earlier, the IEA said.

Indeed, the group’s November decision not to cut output in defense of prices was only “the first step in a plan that includes actually ramping up output and aggressively investing in future production capacity,” the IEA said. While non-OPEC producers are cutting costs, Kuwait, Saudi Arabia and the United Arab Emirates are all expanding their drilling programs. Iraq’s oil production hit its highest level since 1979 in April and Iranian supplies hit their highest since July 2012.

The aggressive push to increase output flies in the face of the IEA’s forecast of demand for OPEC’s oil, which it lowered by 300,000 barrels a day in response to higher expectations of non-OPEC supply. It sees demand for OPEC’s oil at 29.2 million barrels a day this year, well below the group’s current production levels. OPEC itself, on the other hand, upped its expectations of demand for its oil earlier this week to 29.3 million barrels a day.