OPEC Predicts Persistent but Reduced Oil Glut in 2017, Is Mindful of U.S. Shale Growth

by Ship & Bunker News Team
Thursday January 19, 2017

Although the Organization of the Petroleum Exporting Countries (OPEC) in its latest monthly report makes note of crude output reductions and signs of compliance amongst non-members with regards to the cartel's cutback agreement, it cites growing U.S. shale production as a threat to market stabilization and recovering prices.

The report, published Wednesday, reveals that OPEC members pumped 33.085 million barrels per day (bpd) in December compared to 221,000 bpd in November, with the biggest reduction coming from Saudi Arabia (now producing about 10.47 million bpd).

The report stresses that this reduction occurred ahead of the implementation of the cutback deal, and that "a continued normalization of monetary policies, indicating improving economic conditions, together with the recent historic cooperation between OPEC and non-OPEC producers, should help to bring needed stability to the oil market."

The report, which was upbeat about global economic growth (revising the 2017 growth rate upward by 0.1 percent to 3.2 percent) and world oil demand (rising 1.16 million bpd to 95.60 million bpd), also stated that oil supply from non-members will contract by 180,000 bpd, mainly due to compliance with the cutback deal.

Moreover, "non-OPEC supply adjustment commitments are somewhat challenging for those countries [participating in the agreement], however initial reports show positive signs of compliance with pledged production adjustments," according to the report.

However, in reducing its forecast of non-OPEC supply growth in 2017 to 120,000 bpd, the report points out that this will be offset by a 230,000 bpd upward revision to U.S. supply: "The main component of U.S. oil output – tight oil – is forecast to grow."

The report did not pursue the implications inherent in this growth, but Reuters stated that "A renewed jump in U.S. supply, effectively subsidized by the voluntary cuts elsewhere, could weigh on OPEC efforts to boost oil prices and provide an echo of developments which led up to the price crash starting in mid-2014."

If OPEC output remains steady, there will supposedly be an average surplus of 985,000 bpd this year, down from last month's report prediction of 1.24 million bpd; the report did not specify if rising shale was factored into this forecast.

Taken at face value, the rate of this reduction does not correlate with a recent prediction by the International Energy Agency that a significant supply-demand gap is possible within three years; the minuscule drop in surplus also puts into serious question a recent remark made by Khalid al-Falih, energy minister for Saudi Arabia, that the world may run short of oil by 2020.

While OPEC prefers to downplay potential bad news in favour of an optimistic near-term market outlook, other reports earlier this month drew attention to rising production in several countries: specifically, a Reuters poll showed that Russian production will reach record highs after the end of the OPEC cutback agreement, "setting the scene for further increases in 2018, supported by a higher oil price," according to Christian Boermel, a research analyst at Wood Mackenzie.