Oil price hike from OPEC deal may snuff itself out, IEA says

By Yvonne Man, Betty Liu on 11/24/2016

TOKYO (Bloomberg) -- An oil price surge triggered by a successful OPEC agreement to cut production could be snuffed out as supply surges back, according to the head of International Energy Agency.

If OPEC members agree to limit supplies at their meeting next week, prices could rise to $60/bbl and trigger a jump in global output, particularly from U.S. shale producers, Fatih Birol, executive director of the Paris-based IEA, said during an interview with Bloomberg Television. The output boom could put downward pressure on prices again within nine months to a year, he said.

Brent crude, the global benchmark, has rebounded about 10% from a three-month low earlier this month to trade near $50/bbl in the run up to the Nov. 30 meeting by Organization of Petroleum Exporting Countries in Vienna, where ministers will try to implement supply curbs first outlined in late September. Futures traded at $49.02/bbl at 7:18 a.m. in London.

“Many people expect a freeze or a cut from the Vienna meeting,” Birol said in Tokyo. “But we should also think about the next steps after the possible cut or freeze.”

Brent prices have averaged about $44/bbl this year, almost 50% less than the five year average, amid a global glut that has forced producers to slash spending. Energy markets have entered a period of greater volatility as investments in new production are declining for a third year, Birol said.

“This is the first time in the history of oil that investments are declining for three years in a row,” he said. “As a result, we may see bigger difficulties in a few years time.”

U.S. crude output peaked in June last year, when the country produced an average of 9.61 MMbpd. It’s fallen about 10% to 8.69 MMbopd since then.

OPEC Agreement

OPEC reached a preliminary agreement in Algiers on Sept. 28 to reduce collective output to 32.5 MMbopd to 33 MMbopd, compared with the group’s estimate of 33.6 MMbopd in October. Iraq will shoulder part of the burden of oil-output cuts, Prime Minister Haider Al-Abadi said Wednesday, reversing the nation’s previous insistence for an exemption.

The IEA warned earlier this month that prices may retreat if OPEC fails to enact “significant” cuts as producers outside the group will raise supply next year. OPEC’s own estimates of supply and demand also show that the Algiers agreement would barely drain a record oil surplus next year without the cooperation of non-members such as Russia, the world’s largest energy exporter.

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