On Friday, OPEC concluded its 168th Meeting of the Oil Production and Exporting Countries Conference, with members agreeing to effectively abandon the 30 million barrel per day (mmbbl/d) production limit which has been in place since 2011.
Brent crude, the international standard benchmark, fell some 3.23% on Monday to the lowest front month futures price since late 2008.
Saudi Arabia, OPEC’s largest producer and de-facto leader, has been the driving force behind OPEC’s position – increasing production to 11.6mmbbl/d in 2015 according to the latest addition of DW’s World Drilling & Production Market Forecast.
Buoyed by large currency reserves, the kingdom has been able to maintain production, despite a fiscal deficit of more than 20% according to the IMF.
The main target of OPEC’s policy, US producers, have undoubtedly been hit hard by the resultant oil price decline seen in the last 12 months.
According to Baker Hughes data, the US rig count now stands at 737, down 1183 year to date (as of 4 December 2015). Furthermore, DW estimates US onshore wells drilled has declined by some 46% in 2015.
Despite this, US production has been relatively slow to adjust to the low oil price environment, exacerbating and deepening oil price decline.
DW data shows US liquids production (inclusive of condensates and NGLs) grew by 0.8 mmbbl/d in 2015 – largely in the first half of the year.
Looking to 2016, production decline will be a key theme in Non-OPEC producers, including the US.
Non-OPEC liquids production is expected to fall from 51.1 mmbbl/d to 50.7 mmbbl/d, with the US contributing the vast majority of this.
By contrast, OPEC producers are expected to add 658 kbbl/d to global liquids supply.
Much has been made in the media of the lifting of Iranian sanctions and the subsequent effects on global crude supply – and therefore oil prices.
However, according to DW’s newly published Iran Oil & Gas Market Forecast, crude production will is expected to increase by just over 100 kbbl/d, with large scale additions not seen until 2017 at the earliest.
Consequently, oil prices declining beyond 2015 levels is extremely unlikely.
Recent estimates by the IEA indicate that world oil demand growth will be 1.2 mmbbl/d in 2016.
Given DW’s expectation of total liquids growth of a marginal 250 kbbl/d in the same year, the global crude oversupply will narrow by almost 1 mmbbl/d.
Consequently, it would seem prudent to maintain a level head on oil price outlooks. Despite OPEC’s latest announcement, it would seem we have hit the bottom.
Steve Robertson is a director at Douglas Westwood
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