It's the best of both worlds for OPEC as cheap oil prices increase demand while high-cost rival oil producers are forced to close down wells according to an OPEC study released Oct. 12. And it was all planned.
The strategy by the Organization of the Petroleum Exporting Countries (OPEC) of letting prices fall has been more successful than predicted according to new report. The study (104-page pdf) shows that demand will increase due to the lowest oil prices in 6.5 years.
At the same time, the OPEC strategy has proven successful on the supply end of the equation as high-cost drilling wells in the United States and elsewhere are forced to shut down.
"OPEC forecast on (Oct. 12) that demand for its oil in 2016 would be much higher than previously thought as its strategy of letting prices fall hits U.S. shale oil and other rival supplies, reducing a global surplus," writes Alex Lawler for Reuters.
OPEC's forecast, if realized, would be a further indication its strategy is working. The group last year refused to prop up prices and instead raised output, seeking to recover market share taken by higher-cost rival production.
Supply outside OPEC is expected to decline by 130,000 bpd in 2016, the report said, as output falls in the United States, the former Soviet Union, Africa, the Middle East and much of Europe. Last month, OPEC predicted growth of 160,000 bpd.
Fracking in the United States resulted in "the biggest source of non-OPEC supply growth in recent years," writes Lawler. Drilling has been reduced "and tighter credit conditions have reduced companies' access to funds."
In an earlier piece in The New York Times, energy correspondent Clifford Krauss describes the various factors behind the historically low prices of oil, among them:
What happened to OPEC?
A central factor in the sharp price drops, analysts say, is the continuing unwillingness of OPEC, a cartel of oil producers, to intervene to stabilize markets that are widely viewed as oversupplied. Prices of OPEC’s benchmark crude oil have fallen about 50 percent since the organization declined to cut production at a 2014 meeting in Vienna.
"As of early 2015, the International Energy Agency Oil Market Report forecast average demand for the year of more than 93 million barrels of oil and liquid fuels per day worldwide," according to the IEA.
Read the full story: OPEC sees more demand for its crude in 2016 as cheap oil hits rivals
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