Opec strategy hammers China into 15-year crude output low as rebalance seen this year

Decision not to curb pumping justified as oil companies in world's second-largest economy cut output amid inability to make profit.

The headquarters of Opec in Vienna. The group's oil strategy is starting pay dividends. Vladimir Weiss/Bloomberg

China's crude production dropped by the most in 15 years in another sign that Opec's strategy of flooding markets to drive out higher-cost suppliers is working in the world's biggest energy consumer.

The Asian nation reduced oil output in May by 7.3 per cent from a year ago to 16.87 million tonnes, according to data from China’s national bureau of statistics released on Monday. That is the biggest decline since February 2001.

Shrinking Chinese output may help balance oil markets and sustain a more than 75 per cent rebound in crude from a 12-year low earlier in 2016. The rally has also made Opec more confident its two-year Saudi Arabia-led strategy of trying to win market share from higher-cost producers is succeeding. The glut shows signs of ending as companies shut unprofitable fields and cut investments, according to forecasters from the IEA to Goldman Sachs.

“It’s certainly an important indicator that global oil markets are rebalancing,” said Michal Meidan, an analyst at industry consultant Energy Aspects. “The Saudi strategy is starting to yield results.”

Saudi Arabia has kept its crude oil production steady in May.

The kingdom’s crude oil production in May was 10.27 million barrels per day, an industry source said on Monday. This compares with 10.26 million in April, according to Opec.

But crude supplied to the market in May was higher than production at 10.45 million bpd, the source said. Supply to the market, both domestically and for export, may differ from production depending on the movement of oil in and out of storage.

Lower domestic Chinese output reflects spending cuts by China’s oil drillers amid low prices, said Gordon Kwan, the head of Asia oil and gas research at Nomura Holdings in Hong Kong. PetroChina, the nation’s biggest producer, said in March it expects oil and gas output to fall the first time in 17 years as it shuts fields that have “no hope” of turning a profit, while Cnooc sees output slipping as much as 5.2 per cent this year.

“Lower domestic oil production means that China will rely more and more on imports from Middle East and Russia,” Mr Kwan said. The slump in output “is worse than our forecast”, he said.

Opec said on Monday a supply glut in the world’s oil market is likely to shrink further, leading to a more balanced market by the end of the year.

“The excess supply in the market is likely to ease over the coming quarters,” the group said in its June report.

The oil price is now at about US$50 a barrel, having recovered in recent months from a slide that saw it tumble from more than $100 in 2014 to close to $25 in January.

In its report, Opec attributed the recovery to a myriad of factors, including a weaker dollar, falling production in the United States and forecasts of a sharp fall in non-Opec oil supply this year, partly due to disruptions in some producer countries.

Falling US inventories and production and the impact of wildfires in Canada curbed supply, as did rebel attacks in Nigeria and an oil refinery strike in France.

But Opec also warned that there was still much more oil available than demand for the commodity, and inventories continued high.

“There is still a massive global supply overhang,” it said.

However, it said solid economic growth across the world, despite a weak start to the year, was likely to underpin future oil demand.

Global GDP is expected to rise to 3.1 per cent this year after 2.9 per cent last year.

“Provided that there is a clearer picture regarding oil supply and demand, the expected improvement in global economic conditions should result in a more balanced oil market toward the end of the year,” Opec predicted.

World demand for oil is projected to rise by 1.2 million barrels per day in the second half of the year compared with the same period in 2015, taking global oil demand to an average 94.18 mb/d for the whole year, Opec said on Monday.

Demand in the developed economies belonging to the Organisation for Economic Cooperation and Development (OECD) is expected to be strongest in the Americas, flat in Europe and contracting in Asia.

Outside of the OECD area, demand is expected to be vibrant in India, thanks to solid economic growth, but mixed in China.

On the supply side, non-Opec production is projected to decline, notably so in the former Soviet republics and Russia.

However, Opec noted that oil market operators who re-entered the market with enthusiasm in May became “somewhat less interested in long positions” by the end of the month amid renewed worries about a global overhang of oil stocks.

In Asian trading on Monday, WTI was down 62 cents, or 1.26 per cent, at $48.45 a barrel while Brent fell 61 cents, or 1.21 per cent, to $49.93.

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