|By Arabian Post Staff| The global oil market will most likely remain oversupplied for the rest of 2016 and well into 2017, rating agency Standard & Poor’s has forecast. The view has been attributed to global oil production remaining in excess of demand, and the resulting persistently high crude oil and product inventories putting spot prices and near-term futures under significant pressure.
Members of the Organization of Petroleum Exporting Countries (OPEC), particularly Saudi Arabia, have actually increased production levels to near eight-year highs in 2016, motivated by the desire to defend their market share and by various geopolitical reasons, S&P said.
It notes the potential for production restrictions after the OPEC meeting at the end of September 2016, but expresses caution about the material impact of any such restrictions, since the OPEC members have differing priorities. Even an agreement for a supply freeze would likely maintain the current market oversupply in the near term.
With the end of Western economic sanctions earlier this year, Iranian crude oil returned to the global market fairly rapidly, with production of about 3.6 million barrels per day (mbd) in mid-2016. In general, growth in production from Middle Eastern states, such as Iran, Iraq, and Saudi Arabia, is more than offsetting flat or lower production in other OPEC member states. However, Russia continues to pump at or above the record levels reached in 2015, at about 11 mbd in the first half of 2016.
The International Energy Agency recently published its forecast for the demand for crude oil, revising downward growth in demand to 1.2 mbd in 2017 from 1.3 mbd in 2016, compared to 1.8 mbd in 2015. Uncertainty about global demand over 2017 and 2018, and China and India’s needs in particular, continues to weigh on future prices.
Compounding the global oversupply of crude oil has been North American production, despite this having fallen by about 1.2 mbd since April 2015 to 8.5 mbd in August 2016. These producers have resisted a collapse in production in the face of declining oil prices, even though they have cut capital spending in new wells by approximately 37%.
The overproduction has persisted over 2015 and 2016 in spite of oil prices remaining lower than many producers’ all-in drilling and production costs. As a result, many North American producers are focusing investment on their most productive and profitable wells. In addition, we estimate that oilfield services costs have declined about 35% since 2014, lowering breakeven costs.
There has already been a nascent oil supply recovery in the U.S. over the summer of 2016. Nevertheless, any potential further increase in supply will likely only begin once the nearly 4,000 drilled but uncompleted wells are completed and in production.