RIYADH: Is an oil market turnaround on the cards? Is the Saudi led Organisation of the Petroleum Exporting Countries (Opec) strategy succeeding?

Non-Opec supply is slowing down while the demand is picking up. Output from non-member states would grow by only about 160,000 barrels per day (bpd) next year — 110,000 bpd less than projected earlier — staying at around 58 million bpd in 2016, Opec is now saying.

The International Energy Agency (IEA) forecasts are no different. “Cheap oil prices ushered in by Saudi Arabia led Opec policy of protecting 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 energy agency says.

“The Saudi-led Opec strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, inefficient production.”

Non-Opec production is heading for its worst decline since 1992, IEA asserts.

Arctic and ultra deepwater exploration remains in trouble, while mature prospects such as the UK sector of the North Sea continue to see job and capex cuts.

The casualties of the “success” of the Opec strategy are evident — all seem to concur. “US oil production has shown signs of slowing,” Opec reported.

“This could contribute to a reduction in the imbalance of oil market fundamentals, however, it remains to be seen to what extent this can be achieved in the months to come.”

The US Energy Information Administration (EIA) too is saying that production from several important shale-oil fields is likely to fall by 80,000 bpd by next month. Seasonal factors offshore and weak economics onshore are expected to lead to a decline in US crude oil production. In its short-term market report, EIA notes that the total US crude oil production will decline 4.3 per cent from expected full-year 2015 levels to 8.8m barrels per day by 2016.

The Paris based IEA is no different. “After expanding by a record 1.7m bpd in 2014, the latest price rout could stop US growth in its tracks,” it says. Consequent to all these changes, global oil output may drop by half a million bpd next year — the biggest decline in 24 years — with US shale producers accounting for four-fifths of that drop, the report underlines.

In the meantime, the US inventories have also fallen by 2.1m barrels in the past week, adding to speculation; the US production is slowing.

On the other hand lower prices have helped strengthen the global crude demand too.

Opec projects the world oil demand growth to be around 1.46m bpd for 2015, an upward revision of about 84,000 bpd, projecting the global demand to rise to 94m bpd in 2016 from 93m bpd.

As per the IEA, oil demand growth is set to hit a five-year high this year, touching 1.7m bpd and 1.4m bpd next year.

The IEA does not make supply forecasts for Opec, but said it expects market demand on Opec supplies are projected to rise to 31.3m bpd in 2016, an increase of 1.6m bpd.

One indication of the success of the Saudi led Opec strategy was their growing share in the otherwise comparatively healthy Asian crude markets too.

Despite all this, the debate is far from over. Crude futures fell 2pc or more on Friday a week before, after Goldman Sachs cut its outlook on oil, lowering its 2016 forecast for US crude to $45 a barrel from $57 previously, and Brent to $49.50 from $62, citing oversupply and concerns over China’s economy.

“The oil market is even more oversupplied than we had expected and we forecast this surplus to persist in 2016,” Goldman said in the note entitled “Lower for even longer.”

Citing “operational stress” as a growing downside risk, the Wall Street firm said crude could even fall to near $20 a barrel.

Germany’s Commerzbank has also cut its oil outlook, joining a long list of banks that have downgraded crude price projections on supply glut concerns.

The debate is on. The jury is yet to be out. Yet, more voices have begun saying that a turnaround could be closer than anticipated earlier. Let’s keep our fingers crossed.

Published in Dawn, September 20th, 2015

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