OPEC deal unlikely to lift oil prices for long: bank

WASHINGTON OPEC’s power to help lift oil prices by curbing output will be tested by the ability of shale-oil producers and other unconventional suppliers to ramp up production, the World Bank said.

Crude prices have surged more than seven per cent since Sept. 28, when the Organization of Petroleum Exporting Countries agreed to limit production for the first time in eight years. The group includes 14 major oil producers, from Saudi Arabia to Iran and Nigeria. A global supply glut has caused oil prices to slump over the past two years.

But the rise of non-traditional sources of supply, in particular oil extracted from U.S. shale deposits, will constrain OPEC’s ability to control prices, the World Bank said Thursday in its latest commodities-market outlook. Shale drillers benefit from shorter production cycles than conventional suppliers, and shale development costs have fallen significantly, according to the Washington-based development lender.

“Should OPEC and other producers succeed in restraining production and lifting prices meaningfully, investment in oil production and non- OPEC supply would likely rise — especially in view of the flexible nature of shale oil production,” the World Bank said. “This is likely to test OPEC’s ability to lift oil prices in the medium term.”

OPEC is expected to announce the details of the deal at a meeting on Nov. 30. Iran, Libya and Nigeria will likely be exempted from the agreement due to earlier production losses, the World Bank said.

History shows agreements to curb commodity production have a limited shelf life, the World Bank said. Since the Second World War, countries have struck deals to suppress output of everything from tin and coffee to natural rubber. Many of the agreements were supported by laws governing exports and inventory management.

“However, these laws proved to be the agreements’ undoing,” the World Bank said. “Over the long term, price and trade restrictions imposed by some of the agreements either encouraged the emergence of competitor products, such as aluminum for tin, or the entry of new producers.”

The World Bank raised its forecast for crude oil, projecting prices will reach US$55 per barrel next year from an average of US$43 per barrel this year. The development lender previously predicted prices would rise to US$53 per barrel in 2017.