Saudi's Strategy Is Starting To Work, #iea Says

By 11th December 2015 Industry News No Comments

OPEC’s decision on December 4 to jettison its official 30 M/bpd production ceiling reflects the group’s “renewed determination to maximize low-cost OPEC supply and drive out high-cost non-OPEC production- regardless of price,” the International Energy Agency said in its monthly report released this morning. Growth in global oil demand is seen slowing next year amid the “unrelenting” oversupply of crude, with the “first signs of a slowdown” in demand being seen in 4Q15.

Saudi’s Strategy Is “Starting To Work”

OPEC’s market share defense strategy is starting to take a toll on non-OPEC supply, the IEA said. “There is evidence the Saudi-led strategy is starting to work. Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 mb/d in November from 2.2 mb/d at the start of the year.”

Next year, the IEA forecasts a 0.6 M/bpd decline in non-OPEC supply, as US light tight oil – the catalyst of non-OPEC growth – shifts into contraction. “As companies make further spending cuts in reaction to sub-$50/bbl oil, the impact on supplies – both from non-OPEC and OPEC – will be even more pronounced in the longer term.”

Demand Growth Seen Slowing In 2016

“Consumption is likely to have peaked in the third quarter and demand growth is expected to slow to a still-healthy 1.2 million bpd in 2016, as support from sharply falling oil prices begins to fade,” the IEA said.

The report says that early indicators for 4Q15 indicate growth easing to 1.3 M/bpd Y/Y, from a 3Q15 peak of 2.2 M/bpd. The resulting annual growth of 1.8 M/bpd for 2015 is led by China, the US, India and Europe.

The IEA forecasts global demand growth of 1.2 M/bpd for 2016, representing a significant slowdown from this year’s five-year high as many of the factors that contributed to a rapid increase in oil consumption “are likely to prove temporary.”

Global Supply Growth Up “On Higher OPEC Crude Output”

At the same time that global oil demand growth shows signs of slowing, world oil supply increased in November to reach 96.9 M/bpd “on slightly higher OPEC crude output.”

Total global supplies stood 1.8 M/bpd above LY, with OPEC accounting for most of this. Non-OPEC supply was 58.5 M/bpd in November, but annual growth slowed to below 300 K/bpd from 2.2 M/bpd at the beginning of 2015.

Nonetheless, the report said that despite the drop in oil prices and slowing world demand growth, OPEC’s oil production was up 50,000 bpd in November to 31.73 M/bpd “with record production from Iraq and higher supply from Kuwait offsetting losses from African members.”

Since June, OPEC supply has been running at an average 31.7 M/bpd, with Saudi Arabia and Iraq – the group’s largest producers – pumping at or near record rates, the IEA noted.

Storage Capacity Concerns “Overblown”

Contracting non-OPEC supply and on-trend demand growth should lead to a pronounced slowdown in the pace of global stock builds in 2016. However, the IEA noted, as extra Iranian oil hits the market after the lifting of Western sanctions, inventories are projected to increase by 300 million barrels.

However, concerns about reaching storage capacity limits “appear to be overblown.” The report said, “Oil tank tops should not come under pressure any time soon, due to spare storage capacity in the US and expectations of future storage capacity additions.” Much of the surplus oil will be absorbed by 230 Mb of new storage capacity additions, the agency noted, “while US inventories are only 70% full.”