OPEC sees oil glut shrinking in 2016

Low prices curb rival output

Kuwaiti Finance Minister Anas Al-Saleh (center), Pakistani Federal Minister of Finance, Senator Mohammad Ishaq Dar (right), and Governor of Saudi Arabia Monetary

LONDON, Nov 12, (RTRS): OPEC said its oil output fell in October and forecast supply from rival producers next year would decline for the first time since 2007 as low prices prompt investment cuts, reducing a global supply glut.

In a monthly report, the Organization of the Petroleum Exporting Countries said it pumped 31.38 million barrels per day (bpd) last month, down 256,000 bpd from September. That is the first decline since March, according to OPEC figures.

The forecast of a decline in supply outside OPEC, if realised, would be a further indication the group’s strategy is working. OPEC last year abandoned a longstanding policy of propping up prices and instead raised output, seeking to recover market share taken by higher-cost rival production.

Oil is trading at around $45 a barrel, more than 50 percent below its price in June 2014.

“The recent decline in oil prices has encouraged additional oil demand,” OPEC said in the report. “It has also provided a challenging market environment for some highercost crude oil production, which has already shown a slowdown.”

The group expects non-OPEC supply next year to fall by about 130,000 bpd, following growth of 720,000 bpd this year, “as nearly $200 billion of capex cutbacks this year and next create a gaping supply hole”.

Oil companies have cancelled or put on hold projects around the world and OPEC expects output in the United States, the biggest source of non-OPEC supply growth in recent years due to the shale boom, to be hit by reduced drilling activity.

Production

OPEC production, which has surged since the policy shift of November 2014 led by record Saudi Arabian and Iraqi output, fell in October on export delays in Iraq and lower supply from Saudi Arabia and Kuwait, said the report, citing secondary sources.

The report points to a 560,000-bpd supply surplus in the market next

Saleh did not specify when the issue might occur or whether it would feature conventional or Islamic bonds. In September, he had said Kuwait planned to issue local-currency sovereign debt by the end of this year.

Kuwait’s budget deficit in the April-August period stood at 1.094 billion dinars ($3.62 billion), after a deduction for the Future Generations Fund, part of it sovereign wealth fund.

Kuwait’s financial regulator has released rules covering issuance of Islamic bonds in a move that could facilitate sales of sukuk by both the government and corporations.

Corporate issuance of sukuk in Kuwait has dropped off in recent years, and the vast bulk of issuance has been in US dollars rather than in Kuwaiti dinars. The government has not issued sukuk.

Bankers blame the lack of a specialised legislative framework covering Islamic bonds; two defaults on Kuwaiti corporate sukuk during the global financial crisis in 2009-2010 made investors wary of new issuance without such a framework.

Rules issued by the Capital Market Authority (CMA) this week aim to provide a legal basis for issues. The rules outline conditions that sukuk must meet to be tradeable, and describe specific formats such as instruments with perpetual tenors and those which can be converted into shares.

Sukuk issues must be approved by both the CMA and the central bank, according to the rules, which set out the obligations and powers of custodians of the instruments.

The government could be an early user of the rules because low oil prices have strained its finances. Finance minister Anas al-Saleh said in September that Kuwait planned to issue local-currency sovereign debt by the end of this year to cover its budget deficit.

Mazin al-Nahedh, chief executive of Kuwait Finance House , one of the world’s oldest and largest Islamic banks, told an Islamic finance conference in Kuwait on Wednesday that lack of regulation meant KFH previously had to issue sukuk in foreign jurisdictions.

The new CMA rules will help to encourage corporate issuance of sukuk within Kuwait, allowing borrowers to tap ample investor demand inside the

Agency Fahad Abdullah al-Mubaral, attend the International Conference on Islamic Finance, in Kuwait City on Nov 11. (AFP)

year if the group keeps pumping at October’s rate, down from 750,000 bpd indicated in last month’s report.

For 2015 though, the report implies a much larger surplus of almost 1.8 million bpd due to high OPEC production and the still-growing rival supplies that have boosted inventories.

Now, the market is in the midst of only the second period in a decade when inventories in developed OECD economies have exceeded the five-year average by more than 150 million barrels, OPEC said. The first was in 2008 when demand crumbled following the financial crisis.

OPEC left its 2016 oil demand forecasts unchanged, predicting the world would need 30.82 million bpd of OPEC crude and global demand would grow by 1.25 million bpd, marking a slowdown from 1.50 million bpd in 2015.

Saudi Arabia, the driving force behind’s OPEC’s strategy shift, told OPEC it raised production to 10.28 million bpd in October. Output hit a record 10.56 million bpd in June.