A pumpjack operates near a hydraulic fracturing ( fracking) test well at the Inglewood Oil field in Los Angeles, California. The US is producing oil at the fastest rate in almost two decades as horizontal drilling and hydraulic fracturing unlock resources in an unprecedented level. The pressure on Opec shows how the energy boom in the US is contributing to the biggest annual accumulation of inventories since 2008.

Bloomberg/London/New York

Opec’s likely decision to leave quotas unchanged next week belies the growing prospect of having to make the deepest oil-production cuts since 2009 as a global supply surge threatens to weaken prices.
The Organisation of Petroleum Exporting Countries may need to lower output by 1mn bpd, or 3%, in the first half of next year, according to Societe Generale. Brent crude may drop 20% by June if the group doesn’t reduce the amount it pumps, the Centre for Global Energy Studies said.
The pressure on Opec shows how the energy boom in the US is contributing to the biggest annual accumulation of inventories since 2008. At the same time, Iraq, the second-biggest Opec member, is embarking on plans to more than double capacity nine years after the US-led invasion all but froze output.
“There is a danger if Opec doesn’t do anything that prices may collapse,” said Nordine Ait-Laoussine, who was oil minister for Algeria, an Opec member, in 1991 and 1992 and now runs Nalcosa, a Geneva-based consultant. “The inventory overhang is just untenable. Next year, we have more exports from Iraq, so the overhang may be exacerbated.”
Brent crude has dropped 14% from this year’s peak on London’s ICE Futures Europe exchange. The benchmark for more than half of the world’s crude may sink to $88 a barrel by June if Opec fails to act, said Leo Drollas, chief economist at the London-based CGES, which was founded by former Saudi Oil Minister Sheikh Ahmad Zaki Yamani in 1990. The median of 40 analyst forecasts compiled by Bloomberg is for Brent to average $110 next year.
Opec’s 12 members have pumped an average of 31.6mn bpd this year, the most since 2008 on an annual basis, according to data compiled by Bloomberg. All 18 analysts surveyed by Bloomberg from November 29 through December 4 predicted the group will reaffirm its output ceiling of 30mn bpd when ministers meet in Vienna on December 12.
The US is producing oil at the fastest rate in almost two decades as horizontal drilling and hydraulic fracturing, known as fracking, unlock resources in North Dakota, Texas and Oklahoma. The nation pumped 6.8mn bpd in the week to November 23, the most since February 1994, according to the Energy Department. The country, which bought 21% of Opec’s exports last year, produced more than 83% of its own energy in the first eight months of this year, on course to be the highest annual level since 1991, department data show.
“There’s been all this talk, most of it longer term, of what does the US shale revolution mean for Saudi Arabia and Opec,” said Mike Wittner, head of oil-market research for the Americas at Societe Generale in New York. “Next year is the first time the Saudis need to deal with that. Opec has some serious cutting to do.”
Saudi Arabia, which produces almost three times as much oil as Iraq, needs a price of about $95 a barrel to cover its budget requirements, according to the CGES. Other Opec nations need even higher prices, it estimates.
“If they don’t do anything prices will sag and then fall heavily,” said Drollas, who estimates the group would need to curb output by 2mn bpd by the middle of next year unless it acts more quickly. “They don’t have a great track record of looking ahead. They’re nearly always driving by looking in the rear-view mirror. Then the brick wall is suddenly approaching and they slam on the brakes.”
Oil inventories held by companies in the world’s most industrialised nations, which make up the Organisation for Economic Co-operation and Development, increased by 124.8mn barrels, or 4.8%, in the nine months through September, according to data from the International Energy Agency compiled by Bloomberg. That is the most in percentage terms since 2008, and in terms of total volume the most since 2001.
Oil demand may still recover, while concern that political tension in the Middle East and North Africa, home to eight of the group’s members, will worsen is likely to keep prices at the levels Opec needs, according to Chakib Khelil, a Paris-based independent consultant who was Algeria’s oil minister from 1999 through 2010.
The last time Opec cut its supply target was on December 17, 2008 at a meeting in Oran, Algeria, when it slashed the quota for all members except Iraq by 2.46mn bpd to 24.845mn. That ceiling remained until the start of this year, when a new target encompassing all 12 members began.
Output levels have fluctuated, with the loss of exports from Libya during last year’s uprising accounting for the biggest change. Saudi Arabia has implemented voluntary cuts intermittently, trimming production at the end of last year as Libyan shipments were restored.
“This meeting is the calm before the storm,” said Jamie Webster, an analyst at PFC Energy in Singapore. “There’s a well-known understanding that at current production levels, unless somebody cuts there will be substantial stockpile builds in the first quarter. And the times are gone when Saudi Arabia is willing to step back a bit to allow Iraq to step forward.”
Most ministers commenting publicly before next week’s gathering, including the UAE’s Mohamed al-Hamli and Ecuador’s Wilson Pastor, have signalled no need to alter the group’s target. Saudi Arabian Oil Minister Ali al-Naimi said on October 9 he would prefer lower prices.
The US oil boom is “a big deal” for Opec, Webster said. “It’s not the death of Opec, but it is a recognition that the balancer of the market changes over time, and this is going to create a change.”