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OPEC’s outlook for the coming year is optimistic, with the cartel claiming the global demand for the oil produced by its 12 members will be stronger in 2016 given that crude production by competitors is dwindling, thanks to the cartel’s ongoing strategy of letting the markets dictate the price.
In its October Monthly Oil Market Report, issued Oct. 12, OPEC said it expects the market will need 30.82 million barrels per day in 2016 from its member countries, exceeding its previous forecast by more than 510,000 barrels per day. Meanwhile, it said, non-OPEC producers such as, Europe, the Americas and Russia will see a decline in their oil production by 130,000 barrels per day.
“This should reduce the excess supply in the market and lead to higher demand for OPEC crude,” the report said, “… resulting in more balanced oil market fundamentals.”
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The forecast is somewhat counterintuitive because OPEC expects the overall growth in global demand for oil to decline, in large part because of slower economic growth in China. But if non-OPEC nations can’t produce as much crude as before, the market will tighten, to the benefit of the cartel.
“In terms of non-OPEC supply,” the report said, “the impact of lower oil prices on production has resulted in the supply growth forecast being downwardly revised to 0.72 [million barrels per day] in 2015, some 0.6 [million barrels per day] less than the initial forecast and well below the previous year.”
If this expectation is realized, it would validate the cartel’s strategy, devised by Saudi Oil Minister Ali al-Naimi and approved at OPEC’s Vienna meeting in November 2014, not to shore up prices by reducing production, but keeping its members’ combined production at or above 30 million barrels per day.
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Al-Naimi’s plan had two goals: Reclaim market share taken by non-OPEC producers, who at the time were ramping up crude production and creating a price-depressing global oil glut; and depress prices even further to make non-members’ oil unprofitable. Much of the oil produced outside OPEC nations comes from higher cost locations, such as offshore or from shale.
The price of oil has plummeted from more than $110 per barrel in June 2014 to around $50 today. Most fracking operations can’t turn a profit unless the price of oil is around $60 per barrel.
The OPEC report acknowledged that its forecast for countries that aren’t part of the cartel could be somewhat off the mark – that 2016 may be even worse for them. “Oil price fluctuations and technical challenges – such as unplanned shutdowns and sharper-than-expected decline rates – along with geopolitical conditions could affect non-OPEC supply in the coming year,” it said.
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OPEC isn’t alone in forecasting slower growth in the world’s demand for oil. On Oct. 13 the Paris-based International Energy Agency (IEA), which 29 nations consult on energy policy, said it will decline to 1.2 million barrels a day in 2016, down 0.6 million barrels from 2015.
Iran also is expected return to the oil market once the West lifts sanctions imposed because of its nuclear program, adding to supply and thus keeping prices too low to benefit non-OPEC producers, the IEA report said. It estimated that the Islamic Republic’s output will rise to 3.6 million barrels per day from its current level of 2.9 million barrels per day six months after it resumes increased oil exports.
The IEA report also jibes with OPEC on lower crude production outside the cartel. It said oil’s low price and sharp cuts in spending by many oil-producing countries will cut non-OPEC oil production by nearly a half-million barrels per day next year.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com