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Is OPEC’s oil strategy paying off?

The world’s largest cartel has been flooding the market to force out US producers.

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    In this April photo, pumpjacks work in a field near Lovington, N.M. Oil supply from the United States and other countries outside of OPEC is expected to drop sharply next yea, the International Energy Agency forecast Friday.
    Charlie Riedel/AP
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The Organization of the Petroleum Exporting Countries, otherwise known as OPEC, said Monday that its strategy of flooding the market with cheap oil, despite a global oversupply, will pay off next year when demand for its oil will rise.

“Demand is picking up. Good! Supply is slowing, right? That is a fact. You can see I am not stressed. I am happy,” Saudi Arabia’s oil minister Ali al-Naimi told reporters before a meeting of OPEC leaders in June, reported the Financial Times.

“The strategy is working,” he later said.

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The International Energy Agency (IEA), in a report on Friday, confirmed OPEC’s reason for optimism, reporting that supply from non-OPEC countries, including the United States, will plunge in 2016 by almost 500,000 barrels a day.

“As lower prices and reduced spending take their toll, non-OPEC supply growth is expected to decelerate sharply through the end of the year and decline in 2016 – with US growth hit hardest,” says the IEA’s report.

If it costs more to produce a barrel of oil than to sell it at the current price of about $45 per barrel, a six-year-low, companies have to scale back production – as some have – or go bankrupt.

Oil prices have declined by more than half since last year’s peak of about $115 per barrel.

Analysts say American oil producers need to cut their output by at least 500,000 barrels a day, reports The Wall Street Journal, to even out supply and make production a worthwhile investment.

Or, they need to find more efficient methods of drilling in more productive areas to make production cheaper, which is exactly what led to the oil boom in the first place back in 2008. New technologies, like fracking, allowed producers to drill deeper, helping the US surpass Saudi Arabia as the number one oil producer in the world.

In the meantime, the 12 OPEC countries – including Saudi Arabia, Iran, and Iraq – keep producing more oil, hoping to keep prices low enough to make it tough for US companies to do business. Saudi Arabia and Iraq are among the biggest OPEC producers, though Iran plans to ramp up production once international sanctions are lifted, thanks to its nuclear deal with the US.

The IEA said in its recent report that OPEC’s approach appears to be paying off, reports Platts.

“On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, ‘inefficient’ production,” according to the IEA, reports Platts.

Though not everyone agrees with the assessment.

"OPEC is in denial. Shale production will never go away," Fadel Gheit, an energy industry analyst with Oppenheimer & Co. told CNN Money.

"The beauty of shale production is you can dial it up or dial it down. You can adjust your speed depending on the traffic. But you will not get out of the road. You're still in the game," he said.

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