A report from the IMF has warned that the “new normal” in oil will delay the economic recovery in oil-dependent countries. Few would be surprised by this, except perhaps policy-makers in some of these countries who still believe the solution to their problems is an increase in crude oil production, at a time when OPEC is desperately trying to get its members to agree to a freeze.
The report, cited by Nigeria’s Guardian, notes that the factors contributing to the prolonged depression among those who depend on oil for their budgets include not just the persistent glut, but also the constant output from shale in the U.S., the notable decline in crude oil consumption in developed countries, and the strong greenback, in which international oil futures are priced. Also, demand for crude, although growing, is not growing fast enough to offset the combined effect of the headwinds, the IMF noted.
It’s worth pointing out that this lower-for-longer scenario has come despite hefty cuts in investment by the energy industry. What’s more, last week, Wood Mackenzie warned that further cuts will need to be made this year and next to the tune of some US$370 billion, which will bring about a 3-percent decline in output this year, and a 4-percent drop next year.
This, however, is investment from the international supermajors, and might be construed as good news for the struggling oil-dependent economies. In fact, any chance of a production decline on a global scale is good news for those economies.
The IMF seems to be skeptical about the chances of a solid enough decline occurring. The report cited by the Guardian emphasizes the resilience of shale producers and their constant work on lowering production costs to improve breakeven levels. Further, the report says, there is the U.S. fracklog to consider – the number of drilled but uncompleted wells, which can be completed in a matter of weeks, immediately adding more crude to the market. Related: Boone Pickens On Natural Gas: It’s The Way To Defeat OPEC
On the demand side, China is seen as a central factor for the pessimistic outlook. Its economy is no longer growing at the rate from five-ten years ago and Beijing is shifting its economic model to a more service-based one, which will drive down the country’s hunger for commodities. Emerging markets as a whole are a driver of demand and if economic growth there slows, so will the increase in oil demand, according to the IMF.
This year’s demand growth rate will be 1.2 million barrels, the IMF said, and it will stay at this level over 2017 as well, unless some radical change in the commodity’s fundamentals occurs.
It seems that right now everything depends on OPEC’s freeze/cut agreement, whose chances of success are getting slimmer by the day. A ray of light was shed this weekend by Algeria’s Energy Minister, who said he was confident the organization would manage to hammer out a deal.
"There will be no return on the Algiers agreement. Now, we are in application of this agreement. The high-level technical committee is working on it. The Algiers agreement has not been called into question," Nouredine Bouterfa told the country’s state news agency.
Stakeholders can only hope this confidence has a sound grounding.
By Irina Slav for Oilprice.com
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