Opec expects a brighter outlook for the oil market as the low prices of the past year bite further into higher-cost production growth, and with demand forecast to pick up in coming months. Opec's Vienna-based think tank said in its monthly oil market report yesterday that the factors that have been weighing on the market "are showing signs of alleviation".
The main cause for optimism is the sharp slowdown in growth from producers outside Opec, particularly in North America. The report points out that “the oil industry has experienced a rapid fall in global upstream spending, down by more than 20 per cent, with North America cutting as much as 35 per cent. This has led to lower activity – less drilling and the delay or cancellation of new projects – which has put pressure on production growth”.
Oil production in North America grew last year by more than 1.9 million barrels per day, which had slowed to 1.8 million bpd in the first half of this year.
But according to preliminary Opec figures, that growth had dropped to just 420,000 bpd in the third quarter of this year, with shale oil (or tight oil) producers particularly hit.
“Smaller operators active in tight oil have been particularly affected by low prices, as they are usually pressed for cash,” Opec reports.
“Accessing credit has become more challenging as the decline in oil prices has diminished the value of companies’ collateral,” accelerating the slowdown in production growth.
The low oil price will continue to cut into investment across the board, Opec predicts, with slowdowns in Africa, Russia and elsewhere, as well as a continued drop in North America. Opec forecast a decline in overall North American production in the last three months of this year as well as next year, bringing an oversupplied oil market into balance next year.
"The increase in non-Opec supply last year was more than twice that of global oil demand growth," Opec's report notes. But "this relationship is expected to flip this year before widening further in 2016 so that world oil demand growth exceeds the change in non-Opec supply".
The upbeat outlook had been foreshadowed by Opec’s secretary general, Abdalla El Badri. At a conference in Kuwait on Sunday he said: “We have recently seen a contraction in production from some non-Opec producers and an uptick in demand growth. We are hopeful that the industry will see a more balanced oil market in 2016.”
Qatar’s minister for energy, Mohammed Al Sada, also echoed the Opec report, saying there had been a substantial fall in industry investment, even warning that “this trend of reducing investment in the oil industry could result in production shortfalls down the line”.
The turnaround in market sentiment has been building since oil prices hit a six-year low at the end of August, when the world benchmark North Sea Brent futures hovered just above US$37 per barrel. Brent was trading at about $53 per barrel in the latest session.
“Just a few weeks ago, the view that low oil prices are here to stay was the dominant one,” said Amrita Sen, an oil market analyst at Energy Aspects in Singapore.
“Expectations were for 2016 to be yet another depressed year with prices perhaps averaging less than $50 per barrel,” she said.
“But now, oil prices have started to find some momentum, and rightly so given the accelerated declines in US production and the big cuts in [capital spending] across the industry affecting expectations about future supplies.
“Risks of another plunge lower in prices are diminishing as the rebalancing process continues in earnest,” Ms Sen concluded.
amcauley@thenational.ae
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