THE WALL STREET JOURNAL

Weak Oil Prices Curbing Production

U.S. oil benchmark advances to highest level of 2016 on signs of
output cuts


By BILL SPINDLE / April 12, 2016 7:51 p.m. ET


The debate among the world’s biggest oil nations over whether to freeze production is beginning
to be overtaken by a rapid slide in output around the world.


On Tuesday, as traders looked to a weekend meeting on output in Doha, Qatar, the government
said U.S. production dropped in March and will likely continue falling.


The combination amounted to a double-shot of adrenaline for an oversupplied market, driving oil
prices to their highest point this year. The price of U.S. oil jumped 4.5% to $42.17 a barrel, its
highest price since November.


For weeks, oil markets have been preoccupied with the likelihood of an agreement being reached
in Doha. Helped by speculation of a deal led by Russia and Saudi Arabia, the world’s two
biggest producers, oil prices have recovered by almost one-third from the lows earlier this year.


But increasingly, the low price of oil is doing the work for the world’s big producers by
knocking down production across the globe, according to traders and industry officials.


Cash-starved smaller producers in Latin America, the North Sea and the shale fields of the U.S.
are cutting production sharply. That could reduce or eliminate the glut of oil hanging over the
market as early as late this year, some analysts said.


“The impact of this price decline is going to be felt over the next few years,” said Jason Bordoff,
director of the Center on Global Energy Policy at Columbia University. “It took longer than
expected and the price had to fall farther than expected, but it means there’s not going to be as
much supply in a couple of years.”


London-based research consultancy Energy Aspects recently revised its estimates for non-OPEC
production declines this year to 700,000 barrels a day from 200,000 to 300,000 in earlier
forecasts. It expects demand to begin outstripping supply and drawing on swollen crude
stockpiles globally starting in June.


Against that backdrop, any agreement to freeze production at the planned Doha meeting could
signal that the bottom of the oil-price rout has already passed. Others in the Organization of the
Petroleum Exporting Countries—including Venezuela, Iraq, Qatar, Kuwait and the United Arab
Emirates—have said they would likely go along with such an agreement, but it remains unclear
whether OPEC members would go along with a freeze if Iran, also an OPEC member, doesn’t
participate.


For its part, Iran, which only months ago escaped international sanctions that had slashed its oil
exports by half, has said it has no intention of restraining output until its production increases to
four million barrels a day, the level before sanctions. Iran is currently pumping around 3.1
million barrels a day.


Iran’s oil minister called the freeze plan “a joke” after an earlier Russia-Saudi Arabia summit to
discuss it, denting optimism over a potential deal.


Saudi Arabia has sent contradictory messages about whether it would agree to a freeze without
Iran. While its oil minister broached the possibility of an agreement without Iran, the kingdom’s
powerful deputy crown prince, Mohammed bin Salman, said in a recent interview that Iran
would have to participate. The two countries are locked in a larger geopolitical struggle for
influence across the Middle East, raising questions about whether the kingdom might prioritize
keeping up the political pressure on Iran through lower oil prices.


Saudi Arabia raised its oil output above 10 million barrels a day last year in a bid to gain market
share.


Many analysts put low odds on Iran joining in a freeze deal.


“It would be suicide for politicians in Tehran to capitulate to Saudi Arabia and freeze output,”
said Saadallah al-Fathi, a United Arab Emirates-based consultant and former OPEC official.
“How can Saudi Arabia seriously ramp up to over 10 million barrels a day, say it is going to
freeze and then expect Iran to comply with that?”


That still may not stop OPEC members and Russia from freezing production on their own. Even
the strongest oil producers are feeling increasing pain from the drop in revenue, and they may
see a freeze as the only way to get relief. Most of the Gulf Arab states—including Saudi Arabia,
Kuwait, Qatar and the Emirates—have seen their once-unquestioned rock-solid creditworthiness
reviewed or downgraded in recent weeks.


The expressed willingness of Qatar, Kuwait and the U.A.E. to support a freeze “indicates that the
economic pain of low oil prices is even hitting the flushest of the oil producers,” said Helima
Croft, head of commodities strategy at RBC Capital Markets.


Some countries, such as Venezuela, can’t afford to wait for a rebalancing to play out between
supply and demand, she said, while some of “the Gulf states could wait and don’t want to wait.”
But even without a freeze, industry officials and traders say the hardships imposed by 18 months
of low oil prices are weighing heavily on global production. International oil companies and
petrostates alike have minimized exploration and slashed drilling budgets.


After showing surprising resilience for more than a year, U.S. companies operating in the shale
basins of Texas, North Dakota and Colorado are seeing accelerating output declines.


The U.S. Energy Information Administration said in its short-term energy outlook Tuesday that
U.S. crude production fell by 90,000 barrels a day in March from February. The agency lowered
its U.S. output forecast for 2016 to 8.6 million barrels a day and 8 million barrels a day in 2017.
That is off from a multidecade peak of 9.4 million barrels a day last year.


It isn’t just U.S. shale fields falling off. In the deep waters of the North Sea, where production is
expensive, declining investment has meant the output declines that fields naturally experience
over time have overtaken production from new drilling.


Norway’s crude-oil production, for example, grew by 4% to 1.56 million barrels a day in 2015.
But output is expected to drop by 2% in 2016 and gradually level off to 1.38 million barrels a
day in 2019, according to the Norwegian Petroleum Directorate.


Oil production in Latin America is plummeting, as well, according to Energy Aspects. In Brazil
nearly all of the biggest fields could see declines this year. Overall, Latin American production
in February and March dropped below 8 million barrels a day for the first time since March
2014. Production in Mexico and Venezuela is also falling.


That is encouraging many industry officials long searching for a bottom of the current price
slump.


“We’re going to have a lot of volatility going forward, but from here on, the trend is up,”
Torbjorn Tornqvist, chief executive of Swiss trading house Gunvor Group, told the FT
Commodities Global Summit in Lausanne, Switzerland, predicting a slow recovery to about $60-
$70 a barrel.


Other observers aren’t so sure. Although production is coming down, a significant chunk of it
could return from U.S. shale fields if prices rebound sharply. Unlike traditional producers, which
need years of lead time to ramp up production, shale producers say they might be able to reverse
course in a matter of months. At the least, that could restrain any uptick in prices, and could send
them plunging again.


“The key is going to be, once we have a pickup in prices how does shale respond? The jury is out
on that.” said Christof Ruhl, global head of research for the Abu Dhabi Investment Authority.


— Sarah Kent, Miriam Malek and Kevin Baxter
contributed to this article.


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