NBK ECO­NOMIC RE­PORT

Kuwait Times - - BUSINESS -

growth next year down­ward to 1.2 mil­lion bar­rels per day (mb/d) from 1.3 mb/d in its last re­port, the IEA is tak­ing its cue from the In­ter­na­tional Mone­tary Fund’s (IMF) re­cently re­leased World Eco­nomic Out­look. The IMF fore­sees a slightly weaker-thanex­pected global re­cov­ery in 2015 and 2016 on ac­count of a more pro­nounced slow­down in emerg­ing mar­kets, es­pe­cially China. The boost to the econ­omy from lower oil prices is also ex­pected to dis­ap­pear next year.

OPEC oil out­put

OPEC oil pro­duc­tion in Septem­ber, led by an in­crease of 80,000 b/d in Iraqi out­put, reached a three-and-a-half-year high of 31.6 mb/d, ac­cord­ing to OPEC data ob­tained from sec­ondary sources. (Charts 6 & 7.) This would make Septem­ber the fifth con­sec­u­tive month that out­put has topped 31.0 mb/d and the fif­teenth con­sec­u­tive month that out­put has ex­ceeded the oil ex­port­ing group’s 30.0 mb/d of­fi­cial ceil­ing. As men­tioned above, Iraq recorded no­table gains in out­put to reach near record lev­els of 4.1 mb/d in Septem­ber. This was largely due to the re­sump­tion of oil ex­ports from the coun­try’s north af­ter pre­vi­ously sab­o­taged pipe­lines to Turkey were re­paired. Mean­while, fed­eral oil fields in the south con­tinue to pump at record lev­els. Iraq’s pro­duc­tion, which in­cludes oil from Kur­dis­tan Re­gional Gov­ern­ment (KRG) ar­eas, has surged by 25 per­cent, or 820,000 b/d, dur­ing the last year. This is the world’s fastest source of sup­ply growth. What’s more, this is com­ing against a back­drop of el­e­vated se­cu­rity risks, with Baghdad con­tin­u­ing the fight against Is­lamic State (IS), which still con­trols be­tween a quar­ter and a third of Iraqi ter­ri­tory.

Mean­while, crude out­put from OPEC’s largest pro­ducer, Saudi Ara­bia, con­tin­ued to top 10.0 mb/d in Septem­ber, de­spite drop­ping by 50,000 b/d dur­ing the month. Com­ing off the peak sum­mer en­ergy de­mand sea­son, pro­duc­tion has fallen for three con­sec­u­tive months and yet still re­mains near record lev­els. The king­dom has not shown any in­di­ca­tion that it in­tends to al­ter its strat­egy of de­fend­ing mar­ket share and sup­port oil prices by cut­ting out­put. In fact, it con­tin­ues to discount the price of its crude to Asian cus­tomers as it faces in­creas­ing com­pe­ti­tion from both OPEC and non-OPEC pro­duc­ers. Oil pro­duc­tion from the king­dom’s GCC neigh­bors, Kuwait, the UAE and Qatar, con­tin­ued at pretty much a steady level, although Abu Dhabi looks to be at a more ad­vanced stage than its coun­ter­parts in at­tain­ing its of­fi­cial pro­duc­tion ca­pac­ity tar­get of 3.5 mb/d by 2017 through in­vest­ment spend­ing. UAE out­put reached a record 2.9 mb/d in Septem­ber.

Kuwaiti pro­duc­tion con­tin­ued to edge slowly up­wards in Septem­ber, to an av­er­age of 2.7 mb/d dur­ing the month. The coun­try is aim­ing to re­cover from the loss of at least 250,000 b/d in crude out­put from the par­ti­tioned Neu­tral Zone by ramp­ing up pro­duc­tion from some of its other fields. The au­thor­i­ties re­main com­mit­ted, de­spite the drop in oil prices, to in­vest­ing in oil in­fra­struc­ture and en­hanced oil re­cov­ery (EOR) tech­niques in order to reach their pro­duc­tion ca­pac­ity tar­get of 4.0 mb/d by 2020.

Ira­nian out­put also re­mained steady in Septem­ber, at 2.85 mb/d. Iran’s po­ten­tial re­turn to the oil mar­kets in early 2016 (as­sum­ing the coun­try com­plies with IAEA in­spec­tions and sanc­tions are lifted), with prob­a­bly an ad­di­tional 500,000 b/d within 6 months, is the largest source of down­side risk to oil prices next year. The Ira­nian au­thor­i­ties an­tic­i­pate that pro­duc­tion would reach 2011’s, pre-sanc­tions, level of 3.6 mb/d al­most im­me­di­ately. That would im­ply an ex­tra 750,000 b/d over cur­rent out­put hit­ting in­ter­na­tional mar­kets dur­ing 1Q16. This amount seems op­ti­mistic, even ac­count­ing for the 40 mil­lion bar­rels (60 per­cent of which the IEA es­ti­mates is con­den­sates) Iran could ac­cess quite quickly from stor­age aboard its fleet of very large crude car­ri­ers (VLCCs).

Non-OPEC sup­ply growth

While OPEC out­put re­mains stub­bornly high in the face of low prices, non-OPEC sup­ply growth is fi­nally show­ing signs of slow­ing down. US oil pro­duc­tion, which has been the largest source of non-OPEC sup­ply growth in re­cent years, thanks to the shale oil rev­o­lu­tion, has clearly de­clined over the last 6 months. Cut­backs in cap­i­tal spend­ing by oil ma­jors and re­duc­tions in drilling ac­tiv­ity are be­gin­ning to take their toll. Ac­cord­ing to weekly data pro­vided by the US En­ergy In­for­ma­tion Ad­min­is­tra­tion (EIA), US out­put had fallen from 9.6 mb/d in early June, which was a 44-year high, to 9.1 mb/d by the 23 Oc­to­ber, a drop of 500,000 b/d, or 5 per­cent. While US sup­ply growth is still up on a yearon-year ba­sis, by 1.6 per­cent, ex­pected fur­ther de­clines in the num­ber of oil drilling rigs-rig counts are down by more than 60 per­cent in 2015-and the prospect of US banks reeval­u­at­ing credit lines to cash flow-con­strained shale op­er­a­tors, may push an­nual growth into neg­a­tive ter­ri­tory over the next few months.

The IEA ex­pects non-OPEC sup­ply in 2016 to fall by 0.5 mb/d in 2016, with the US, Rus­sia and Nor­way among the largest oil pro­duc­ers ex­pected to wit­ness de­clines in out­put as a re­sult of lower oil prices and spend­ing cuts. For 2016, the com­bi­na­tion of de­clin­ing non-OPEC sup­ply and health­ier al­beit soft­en­ing de­mand growth should raise the ‘call on OPEC crude and stock change’, the amount of oil that OPEC needs to pro­duce to bal­ance the mar­ket, to 31.1 mb/d, from an ex­pected 29.7 mb/d in 2015.

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