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Can Oil Markets Withstand Recession Fears?

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Andy Tully

Andy Tully

Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com

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OPEC Still Sees Oil Markets Balancing This Year

OPEC acknowledges that it is still producing more oil than its customers can consume, but says a drop in output by producers outside the cartel will begin a “rebalancing” of prices in the coming year.

In its Monthly Oil Market Report, issued Monday, OPEC said demand for its crude averaged 29.9 million barrels per day in 2015, while the group was producing an average of 31.85 million barrels per day throughout the year.

This excessive production came despite declines in output during the year by several leading OPEC members. Saudi Arabia production dropped by 58,000 barrels per day to 10.1 million barrels per day by December 2015; Iraq’s output was down 31,000 barrels per day to 4.3 million barrels per day; Kuwait’s drilling produced 23,000 fewer barrels per day, down to 2.7 million barrels per day; and Nigerian production dropped by 77,000 barrels per day to 1.8 million barrels per day. Related: Does Buffett See A Bottom In Oil Prices

Still, the oil glut persisted because such production decreases, particularly in Saudi Arabia and Iraq, didn’t balance with an even lower demand from OPEC’s customers. Saudi Arabia designed the low-price strategy aimed at making oil production too costly for competitors in North America and Russia, and has refused to make more significant output cuts unless other producers agree to do the same.

The 104-page OPEC report finds that there will be greater demand for the group’s oil in 2016, with customers consuming an average of 31.65 million barrels a day throughout the year because the market will be “supply-driven” as competitors, beset by low prices, continue to cut back severely on capital expenditures ranging from exploration to new drilling.

“It will also be the year when the rebalancing process starts,” the report said. “After seven straight years of phenomenal non-OPEC supply growth, often greater than 2 [million barrels per day], 2016 is set to see output decline as the effects of deep capex cuts [by non-OPEC producers] start to feed through.” Related: Is This The Bottom? Balance In Oil Markets Closer Than Many Think

Until a balance is restored between supply and demand, though, Saudi Arabia is willing to endure the current low price of oil, even as its own budget, heavily reliant on energy revenues, faces a deficit of $98 billion, or 15 percent of gross domestic product, for fiscal 2016.

On Sunday, Saudi Oil Minister Ali al-Naimi, who is considered to be the architect of OPEC’s price war to regain market share, said Sunday that he’s “optimistic” that oil prices will recover, though he conceded that any rebalancing will take “some time.”

The report said a price recovery is expected to cause the most pain among companies drilling in the United States, who rely mostly on hydraulic fracturing, which isn’t profitable unless the average global price of oil is around $60 per barrel. It’s now dropped to about half that. Related: $20 Oil No Longer Seen As Good For The Economy

The cartel’s report said U.S. production will drop by 380,000 barrels per day in 2016 from nearly 13.5 million barrels per day. Other areas that it sees as “particularly vulnerable” because of dramatically reduced capital expenditure are parts of Asia, as well as Canada, Latin America and the North Sea.

OPEC’s report adjusted its expected supply levels to include Indonesia, which resumed its membership in the group in December after a seven-year hiatus. The document noted that Indonesia’s output in 2015 averaged 700,000 barrels per day in 2015.

What the report didn’t mention, however, was the outlook for Iran in 2016 as it returns to the world market now that it’s free of Western sanctions. That may be a major oversight. Iran's oil minister, Bijan Namdar Zanganeh, says it intends to resume production almost immediately to 500,000 barrels per day, and could double that output “after a short while.”

By Andy Tully of Oilprice.com

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  • Joe Smith on January 20 2016 said:
    Saudi's don't seem to understand US bankruptcies. Companies will continue to pump oil but will now be owned by their creditors. Since the restructured companies will be writing down much of their assets and eliminating much of their debt, they will become much more competitive with a much lower breakeven point. As a result, Saudi's strategy to bankrupt US shale companies will guarantee that the price of oil will stay much lower for much longer than it would have if the Saudi's hadn't forced the companies into bankruptcy.
  • John Smith on January 20 2016 said:
    Saudi's are being very naive and showing that they don't really understand how US bankruptcies work. US shale companies that go through bankruptcy will become much more competitive as part of the bankruptcy process. Sure current owners will be wiped out but the companies will continue to pump oil as ownership will merely pass to their creditors. As part of the bankruptcy process, the US shale companies will be able to write down their assets and eliminate much of their debt thereby greatly reducing their break even point. In the end, the Saudi's market share strategy pushing US shale companies through bankruptcy restructuring will back fire on them and guarantee that oil will stay much lower for much longer as it will make the US shale industry much for competitive for the future.

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