PARIS: Cheap oil prices ushered in by Saudi Arabia’s policy of protecting its market share will end up squeezing high-cost producers like US shale drillers, leading next year to the biggest drop in output in nearly a quarter century, the IEA said on Friday.
Cheap fuel is also hooking consumers, with oil demand growth set to hit a five-year high this year, the International Energy Agency (IEA) said in its monthly report.
The oil market has been driven for the past year and half by an increasingly transparent policy by Organization of the Petroleum Exporting Countries (OPEC) oil cartel kingpin Saudi Arabia to safeguard its influence against upstart shale producers who could change global dynamics by cutting US dependence on imported oil.
High crude prices of over $100 per barrel in 2013 were allowing US shale producers to exploit costly technology to extract previously unreachable oil and sharply increase supply in the top oil-consuming nation.
But with Saudi Arabia and its OPEC partners refusing to cut production, crude oil prices have slumped from over $100 per barrel at the end of 2013 to hit six-year lows last month, with the main US oil contract slumping to below $40 at one point.
The IEA, a Paris-based institution which analyses energy markets for advanced oil-consuming nations, said the industry was now beginning to react to lower prices by cutting output.
“US oil production is likely to bear the brunt of an oil price decline that has already wiped half the value off” the main international oil contract, the IEA said in its report.
“After expanding by a record 1.7 million barrels per day in 2014, the latest price rout could stop US growth in its tracks,” it added.
The IEA forecast global oil output may drop by half a million barrels per day next year—the biggest decline in 24 years—with US shale producers accounting for four-fifths of that drop.