Why oil producers will be over a barrel for a long time yet

SaudiArabia’soilminister,Alial-Naimi,center,speakstothepressaheadofameetinglastweekinDoha,Qatar,withenergyministersfromothermajorproducers.SaudiArabiaandRussiaagreedtofreezeoiloutputtotrytostabilizethemarketifothermajorproducersdidthesame,Qatar’soilministersaid. Olya Morvan/AFP/GETTYimages

（WALL STREET JOURNAL）OilpricesmayhaveralliedonanewInternationalEnergyAgencyforecastfordemandtoerodetheexcesssupplynextyearandhopesexporterswillsoonagreetotightenthespigots,butproducersshouldn’tgettooexcited.

Underlyingmarketsfactorsarelikelytoensurethesurgeisshort-lived,justablipinaneraofweakprices.

First,theoutlookfortheglobaleconomyhasdimmedsincetheInternationalMonetaryFundlastcutitsforecast,keepingatightlidondemand.Andsecond,whileproducersmightslimoutput,thecapacitytopumpoilwillfallonlygradually.Asprevioussupplyglutshaveshown,abroadgapbetweendemandandcapacityputsaceilingonastrongreboundinprices,oftenforalongtime.

AlthoughtheIEAspurredhopesthebalancebetweensupplyanddemandwillbebetterbalancednextyear,itwarnedinthesamebreathitcouldtakeyearsforthecurrentgluttofadeevenifU.S.shaleproductionslumpsandmajorexportersagreetotrimoutput.

LeonardoMaugeri,aseniorfellowatHarvardUniversity’sBelferCenterforScienceandInternationalAffairs,saysevenifproducersreachadealtocutoutput,they’llbehard-pressedtoabidebyit.

Aswarmerweatherfuelsaseasonalriseinconsumption,pricesarelikelytotickup.AlongwithsignalsoflowerproductionbytheU.S.andothers,thatmightpersuadesometheworstisover.

“Thissortofcomplacencymayactasabrakeformoredecisionactionsbyoilproducers,whomayconvincethemselvesthatthemarketisfinallyworkingandthereisnoneedtosearchforadifficultagreementforcuttingproduction,”Mr.Maugerisaysinanewreport.

Iranisalreadyunderminingapotentialdeal,wantingtorampupproductionafteryearsofsanctionscrimpedsales.Andasidefromtheoilcartel’shistoryofignoringproductionquotas,souringeconomicprospectsmakeitevenmoredifficultforcountriestosticktotheircommitments.

Aproposedfreezeonnewoutput“givesthesemblanceofcoherentandcrediblepolicy-making,whileallowingcountriestheabilitytodowhattheyweregoingtodoanyway,”aBarclayscommodityresearchteamsaidinareportMonday.

Ontopofthat,pastheavyinvestmentsarelikelytocontinuetoweighonpricesthrough2017.Mostofthemajorannouncedcutstocapitalandoperatingexpendituresinvolvedexplorationanddevelopmentprojectsthatweren’tfullyapproved,Mr.Maugerisaid.

Worldoilproductionattheendof2015totaledaround98.5millionbarrelsaday,outpacingdemandbymorethanthreemillionbarrelsaday,accordingtotheHarvardfellow.That’snotcountingthe4.5millionbarrelsadayofadditionalspareproductioncapacitythat’seithervoluntarilyheldbackbySaudiArabiaortemporarilyshutdownbecauseofpoliticalandtechnicalchallenges.

“Whilemanycompaniesandcountriesannouncedcutstotheirspendingbudgets,veryfewactuallyhaltedinvestmentsalreadyunderway,”saidMr.Maugeri,whopredictedtheoilpriceplummetin2012.

Productioncostshavealsofalleninrecentyears,furtherundercuttingoutputcuts.

Crudeconsumption,meanwhile,isn’tseengrowingbylargeenoughlevelstojustifyamajorincreaseinprices.Toachieveabalanceinthesupply-demandratio,demandwouldhavetogrowby2.5millionbarrelsadaythisyearandtwomillionin2017,Mr.Maugerisaid.That’scomparedwithanaverageannualgrowthrateoflessthan900,000barrelsadayinthelastfiveyearsand1.7millionlastyear.

Aftermanypastboom-bustcycles,demandrecovered,butthenewgrowthratewasmuchlowerasefficiencygainsenforcedinthehigh-priceyearsbledintothesubsequentdownturns,hesaid.

Inthewakeofthe1980splunge,oilpricesstagnatedfornearlytwodecades.

“Butunlessdemandgrowthactuallyexplodes—whichseemsunlikely—thefundamentalsremainthesame,”Mr.Maugerisaid.“Inspiteofsomeerosionofproductionhereandthere,globaloiloutput,productioncapacity,andinventorieswillremaintoohighversusthelevelofconsumptiongrowth.”