NBK ECONOMIC REPORT

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.