Reports of Record Outputs Accompany S&P Prediction Of Oil Not Breaking $55/b Before 2020

Russia is said to be pumping oil at its fastest rate since the Soviet Era

No sooner has the dust settled on the International Energy Agency predicting the global glut will last well into 2017 than an even gloomier outlook comes from S&P Global Ratings: it believes the average price of oil will not rise above $55 per barrel before the end of this decade.

The ratings agency delivered the bad news after revising upwards its assumptions for Brent and West Texas Intermediary this year to $42.50.

S&P forecasts a price climb to a $47 average next year, then to $50 in 2018, and $55 the year after that, with the slow ascent attributed to high oil and product inventories.

The long-term price assumptions also reflect the expected impact of significant industry cost deflation: S&P wrote, "Declining costs come after a decade of inflation, thanks to engineering optimization, improved drilling efficiencies, and production cost reductions, especially in the once high-cost U.S. shale formations.

"Drillers, forced to improvise because of the low prices, have introduced new drilling methods, fracking, and well-completion techniques that have resulted in more permanent cost reductions."

S&P's forecast coincides with data obtained from Russia's energy ministry showing that the former Soviet Union's output in September has been about 11.09 million barrels per day (bpd), the highest monthly average since the Soviet era – and it reached 11.18 million on Tuesday.

Russia this week also launched the Rosneft PJSC- and Gazprom Neft PJSC-run East Messoyakha oil field in Siberia, which is expected to produce 577,000 tons of oil this year and reach a peak of 112,000 bpd at the end of the decade.

Not to be outdone, Venezuela this week announced the start of what is said to be one of the world's largest drilling projects in the Orinoco heavy crude belt; with investments totaling $3.2 billion, Petroleos de Venezuela SA will reportedly drill 480 wells to add 250,000 bpd of new oil output over the next 30 months.

Amidst talk that Organization of the Petroleum Exporting Countries (OPEC) members and non-members are trying to squeeze out as much production as possible while it can, S&P doubts that the ballyhooed OPEC freeze meeting this month will do anything to alleviate the glut.

It wrote, "We note the potential for production restrictions after the OPEC meeting at the end of September 2016, but remain cautious about the material impact of any such restrictions."

The IEA report released earlier this month cited yet another factor contributing to a sluggish market recovery, that of declining demand: it predicts that momentum in 2017 will ease to 1.2 million bpd compared to 1.3 million bpd for 2016 – which itself was a downgrade of 0.1 million bpd on the IEA's previous forecast due to "a more pronounced 3Q16 slowdown."