ON THE RIGHT: Growing uncertainty in the oil market
GLOBAL DEMAND GROWTH is expected to slow from its five-year high of 1.8 million barrels per day (mb/d) in 2015 to 1.2 (mb/d) in 2016 – closer towards its long-term trend as previous price support is likely to wane.
Recent downgrades to the macroeconomic outlook are also filtering through.
Oil at US$50 per barrel is a powerful driver in rebalancing the global oil market, but the big question is just when will equilibrium be restored.
To be sure, the world is using more oil and high cost supply – primarily non-OPEC – is being forced out. But a projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels – should international sanctions be eased – are likely to keep the market over-supplied through 2016.
For now, lower oil prices are supporting strong demand growth. The world’s top consumers, the United States and China, are buying more oil – boosting growth this year to a five-year high of 1.8 mb/d, a leap on paltry gains of 0.5 mb/d in the second quarter of 2014 when oil was in triple digits.
But the outlook for oil demand growth is looking softer next year. The International Monetary Fund, in its latest World Economic Outlook, cut 0.2 percentage points from 2015 and 2016 economic growth, with big markdowns in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia.
The stimulus from lower oil prices is also expected to fade next year with oil demand growth set to slow by 0.6 mb to 1.2 mb/d.
The previously relentless growth in non-OPEC supply is also shrinking fast. Although Brazil and Russia pumped at record rates in August and September respectively – pushing non-OPEC output nearly 0.7 mb/d above a year ago – that is down from gains of 2.7 mb/d in December 2014. Supply in the US – which had been the motor of growth – is already sinking swiftly: year-on-year gains have eased to just 0.3 mb/d from 1.6 mb/d during the first quarter.
Total non-OPEC output next year is expected to contract by nearly 0.5 mb/d as global upstream spending cuts of more than 20 per cent impact both new projects and existing production.
A remarkable decline in costly infill drilling, required to stem declines at producing fields, is already evident with rates in some areas dropping by more than 50 per cent so far this year – nearly double that seen in previous downturns.
Even low cost OPEC producers are tightening their belts. Spending curbs and a severe financial crisis are limiting supply growth in the near term in Iraq, which now ranks as the world’s fastest source of additional supply.
Production from neighbouring Iran could be on the rise once it is released from international sanctions and ramps up towards 3.6 mb/d from 2.9 mb/d currently.
How quickly Iran can bring those extra barrels to the market will make a big difference to 2016 dynamics.
Rising geopolitical tension, such as Russia’s military intervention in Syria, is back in the frame, even if the present global oversupply is tempering the market’s reaction.
These moving pieces are creating uncertainty. Some of this uncertainty may start to clear next year although, considering Iran, the market may be off balance for a while longer.