OPEC forsees lower demand for oil in 2016
The Organisation of Petroleum Exporting Countries, OPEC, has predicted global demand for its crude oil will be less than previously thought in 2016, as supply from rivals proves more resilient to low prices, increasing the excess supply on the market this year.
The monthly report from OPEC contrasts with that of the International Energy Agency, IEA, which last Friday, said producers outside OPEC were cutting production by more than it had expected.
Saudi Arabia in 2014, led a change in OPEC strategy to defend market share instead of cutting output to support prices, hoping to slow growth in rival supplies such as U.S. shale oil. The move accelerated a collapse in prices, which hit a 12-year low of $27.10 in January. The price drop has started to slow the development of relatively expensive supply sources such as shale and forced companies to delay or cancel billions of dollars-worth of projects, putting some future supplies at risk.
In the report, OPEC said it still expected supply from outside the group to fall by 700,000 barrels per day, bpd, this year. But it revised up the absolute level of non-OPEC supply in 2015 and 2016, and said producer efforts to maintain output made its 2016 forecast more uncertain.
'There has been a reduction in production costs, mainly in the U.S., as well as increased hedging, with producers choosing to produce with losses rather than stopping production,' OPEC said. 'This has caused the non-OPEC supply forecast in 2016 to become more uncertain.'
As a result, OPEC now expects the global demand for its crude to average 31.52 million bpd in 2016, down 90,000 bpd from last month's forecast.
The group pumped 32.28 million bpd in February the report said, citing secondary sources down about 175,000 bpd from January, mainly due to outages in Iraq and Nigeria.
Saudi Arabia told OPEC it kept output in February steady at 10.22 million bpd, after the top oil exporter struck a preliminary deal with fellow OPEC members Venezuela and Qatar, plus non-OPEC Russia, to freeze output.
Iran, which wants to regain market share after the lifting of Western sanctions on Tehran rather than freeze output, told OPEC it raised supply to 3.39 million bpd - about 250,000 bpd more than the secondary sources' estimate.
The report indicates supply will exceed demand by about 760,000 bpd in 2016, if OPEC keeps pumping at February's rate, up from 720,000 bpd implied in the previous report.
Meanwhile, IEA said that while oil prices have 'recovered remarkably' in recent weeks, this should not 'be taken as a definitive sign that the worst is necessarily over.
'Even so, there are signs that prices might have bottomed out,' the IEA said in its latest monthly report published on Friday echoing oil markets which have seen a recovery in recent weeks on the back of a weaker dollar which helps to fuel demand.
'For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance,' the IEA cautioned.
'It is clear that the current direction of travel is the correct one, although with a long way to go. Without an increase in demand expectations, high-cost oil suppliers will continue to bear the brunt of the market-clearing process.'
On Friday, benchmark Brent crude futures were trading at $40.81 a barrel (up from the $32.80 a barrel last month when the IEA published its report). U.S. crude was also higher at $38.69 a barrel. At the start of the year, prices tumbled to around $26 a barrel as supply continued to outstrip demand.
But there are signs that prices could have finally bottomed out, the IEA said. These include 'possible action by oil producers to control output; supply outages in Iraq, Nigeria and the United Arab Emirates; signs that non-OPEC supply is falling; no reduction in our forecast of oil demand growth; and recent weakness of the US dollar.'
The IEA maintained its forecast for global oil demand growth for 1.2 million barrels a day (mb/d) in 2016, unchanged from last month. It said there had been a 'sharp deceleration in demand growth in the three months to March, particularly in the US and China. Vanguard