OPEC lowers expectations for non-member output
OPEC once again revised down its expectations for non-OPEC member production growth in its September Oil Market Report, lowering expected output for both 2015 and 2016. The organization projects that for this year, non-OPEC supply growth will average about 880 MBOPD, 72 MBOPD lower than in last month’s report, due to lower-than-expected output from the U.S.
“U.S. oil production has shown signs of slowing,” OPEC said in the report. “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.”
On the demand side of the equation, OPEC revised up its forecast for oil demand growth in 2015 to 1.46 MMBOPD, led by growth in the Organization for Economic Cooperation and Development (OECD). Demand growth for 2016 was revised down to 1.29 MMBOPD because of slower economic momentum in China and Latin America.
OPEC’s own production increased slightly by 13.2 MBOPD in August to 31.54 MMBOPD, with most of the gains coming from Nigeria, Saudi Arabia and Kuwait. Saudi Arabia reported lower production of 10.27 MMBOPD last month compared to 10.36 in July, but secondary sources peg the kingdom’s output higher at 10.36 MMBOPD in August compared to 10.33 in July.
U.S. oil supply to increase in 2017/18 along with prices
While agreeing that U.S. production has tapered off since May, Raymond James Director of Energy Research Marshal Adkins is now projecting that U.S. production will surge after reaching a bottom of 8.98 MMBOPD in February 2016, according to a recent note from the analyst. Analysts at Raymond James anticipate U.S. production from May of 2015 through the end of the year to show sequential declines of about 50 MBOPD per month until March of 2016.
Despite the declines in U.S. production through the second half of the year, Adkins believes 2015 production will grow approximately 540 MBOPD year-over-year, before declining 204 MBOPD in 2016, and surging back up 911 MBOPD in 2017 and 1,752 MBOPD in 2018. Raymond James believes it models show higher growth than most due to their inclusion of efficiency gains and higher than average expectations for 2017/18 rig counts.
Raymond James believes that well efficiencies in particular will help to drive production growth over the next three years. Efficiencies derived from enhanced completion techniques and high-grading will lead to initial productivity gains per well of 24% this year and 15% next year, based on the analyst’s calculations. Improved efficiencies in combination with shallowing shale decline curves will allow for “modest oil production gains starting in early 2016 without a massive surge in U.S. drilling activity,” according to the note from Raymond James.
Using Eagle Ford wells to illustrate, Adkins shows that while production has increased by an estimated 189 MBOPD over the last year, absolute monthly declines from the field are roughly 21 MBOPD lower in the Eagle Ford today than in December 2014.
As fewer new wells are drilled across the U.S., decline rates will moderate, meaning fewer wells will be necessary in order to offset lower production from older wells. “By the time production rolls back into high gear at the start of 2016, we believe the average absolute decline each month will be about 100 MBOPD less than it was at the start of 2015,” said the analyst note.
Demand will catch up
While answering whether the increased production from the U.S. would be bearish for markets, Adkins emphatically responded “NO!” Low prices will continue to drive higher demand despite of instability in parts of the global market, pushing global oil demand growth in 2015 to roughly double the average growth rate of the past seven years, according to the analyst note. Low prices will affect non-U.S. and non-OPEC production, however, leaving room for increased production from the two groups in the market.
“The combination of higher than normal oil demand growth with falling non-U.S., non-OPEC supply still leaves the world oil markets undersupplied in 2017 and 2018 even with the massive projected growth that we expect out of the U.S.,” said Adkins. “At oil prices below $70, the world will desperately need this surging, low-cost U.S. oil to satisfy growth demand and counteract falling supplies from higher cost areas outside of the U.S.”
High output hurting Saudi Arabia
As OPEC’s largest producer remains adamant about not holding a meeting to discuss markets, saying it would backfire, Saudi Arabia is selling its reserves in order to bolster its budget. In February and March, the kingdom saw net foreign assets drop by more than $30 billion, the biggest two-month drop on record, reports CNBC.
According to analysts, Riyadh has sold off about $60 billion in the last 10 months alone, mainly to finance new spending and to support its currency’s peg to the U.S. dollar. A report from the International Monetary Fund (IMF) from August 17, projected that Saudi Arabia will likely post a fiscal deficit of 19.5% of GDP this year, compared to 3% of GDP last year. The IMF anticipates that the deficit will decline after this year, but it will remain high over the medium-term.
While the use of foreign reserves has helped to keep Saudi going, it has not proved to be a cure-all. In August, ratings agency Fitch revised the outlook for the kingdom to “negative” citing Saudi Arabia’s “absence of an effective fiscal policy response to the lower oil price environment.”
“Without adjustment to the current fiscal path, and if oil prices persist at $50 per barrel, Saudi Arabia could use up its financial buffers by 2019,” a note from Barclays said. “We think [riyal] devaluation is not imminent, though further delays to fiscal reforms could heighten perceptions of risk around the sustainability of the fiscal path, the credibility of the peg as well as undermine sovereign creditworthiness in the medium term as debt build-up accelerates,” it added.