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Analysts doubt OPEC deal will lift oil prices

By Zheng Xin | China Daily | Updated: 2016-12-09 07:49

Whether or not oil prices will rise, due to OPEC's planned crude output cut, remains to be seen, top industry analysts said.

OPEC member countries agreed last fortnight to cut their oil output by 1.2 million barrels per day. The first such deal in eight years, the agreement intends to shrink a global glut that has dragged down benchmark prices.

But the planned production cut from next month might not help reduce crude output at one go or in the near future, said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates and a Pulitzer Prize-winning author.

Instead, OPEC member countries will likely curb crude production gradually due to financial pressures and economic stress. This makes the deal's impact on oil prices difficult to ascertain now, said Yergin at the 2017 International Oil and Gas Executive Forum in Beijing on Thursday.

Yergin is regarded as one of the energy sector's foremost experts. Incidentally, he recently joined US President-elect Donald Trump's team.

The crude price has dropped to $40 from $115 per barrel at its recent peak in the summer of 2014, hurting the financials of oil giants and major exporting countries.

Echoing Yergin's view, Wang Lu, an Asia-Pacific oil and gas industry analyst from Bloomberg Intelligence, said that if OPEC member countries stick to their production quotas and deliver the promised cut, market sentiment will improve next year.

But whether they actually succeed in cutting production remains a moot point, he said.

In addition, the US shale industry is also poised to rebound from the brink, following the OPEC deal, she said.

"US shale oil production is reactive to oil prices, and when oil prices recover to the range where it becomes economical for producers to bring more activity, they will add more rigs, so oil production in the US may start to grow again," said Wang.

"That's why, US oil production can serve as the stabilizer of oil prices and limit the further upside of recovery."

Qian Xinkun, an analyst with the CNPC Economics and Technology Research Institute in Beijing, agreed. "The slide in costs caused by OPEC member countries cutting supplies might encourage more US shale output.

"OPEC's decision to cut output is good news for the US shale patch. Whether the global crude price will rise also depends on the next US move."

According to Wang, US oil production showed great resilience and may return to volume growth next year.

"In addition to the rising rig count and rising productivity as measured by new well production per rig per day, the capex (capital expenditure) may rise next year," she said. "When capex rises, production may go up despite a time lag."

According to Yergin, OPEC was unable to reverse the current slump in crude prices. Its economic power has been weakened; the association has become irretrievably divided, he told Financial Times in a recent interview. "The era of OPEC as a decisive force in the world economy is over."

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