Surging shale oil production will cost Opec market share next year and push global crude supply beyond demand, predicts the International Energy Agency (IEA).
The IEA's assessment comes a day after Opec, for the first time, acknowledged the threat of shale oil to its market position.
Boosted by North American output, incremental production from non-Opec countries will reach 1.3 million barrels per day (bpd) next year, the IEA said in its monthly oil market report yesterday.
In spite of an improved economic outlook, global demand for crude will increase only by 1.2 million bpd, according to the agency.
Demand for Opec crude will decline by 200,000 bpd to 29.4 million bpd.
On Wednesday, Opec for the first time conceded that shale oil is starting to change the dynamics of the oil markets. In its monthly report, it forecast that next year non-Opec oil will displace 300,000 bpd of crude from the organisation's members in the market.
Oil production in North America is boosted by hydraulic fracturing, or fracking, a technique that dislodges oil and gas trapped in deep-lying shale rock formation. Fracking has already transformed the US gas sector, and is driving the revival of the country's oil production.
According to the IEA, 800,000 bpd of next year's additional supply from outside Opec will come from North America.
The agency believes that the US will overtake Saudi Arabia as the largest producer of crude within five years.
Opec's position in the market is also challenged by the political volatility that continues to affect the Middle East and North Africa in the aftermath of the Arab Spring.
In June, Opec production fell by 370,000 bpd over supply disruptions in Iraq, Libya and Nigeria.
"Above-ground disruptions in the Mena region already have provided a major offset to rising North American supply, and may continue to do so," said the report.
If it continues to grow strongly, North American shale production will provide a buffer from the political risk in the Middle East and North Africa, analysts say, as it will allow Saudi Arabia to curb its output, increasing the idle production capacity it can put back into operation at short notice. "When Saudi Arabia cuts back there will be more spare capacity and the market will be more at ease about regional instability," said Robin Mills, the head of consulting at Manaar Energy.
US and Canadian oil production will grow by nearly 4 million bpd in the five years up to 2018, projects the IEA, equal to almost two thirds of non-Opec supply increases in that period.
If Opec's share of the global market continues to decline, it will exacerbate tensions between Saudi Arabia and Iraq. The latter plans to ramp up production strongly in the coming years, meaning that Opec's voluntary production ceiling will be maintained only by reduced Saudi Arabian output.
If the organisation cannot agree on a ceiling, the resulting increase in exports will reduce the price fetched for its oil.
Global supplies fell by 290,000 bpd last month, said the IEA, as rising non-Opec production failed to absorb declines in the Middle East and Africa.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
