Oil Supply Is Still Rising With $30 Oil
While many have called for falling U.S. production to balance the market, OPEC is showing it still has the power to determine global prices. While collapsing rig counts and strict capital spending caused non-OPEC supply to drop by 500,000 barrels a day in January compared with the previous month, OPEC production rose to 32.6 million barrels a day, an increase of 1.7 million barrels a day. In total, despite a strong pullback by North American producers, world supply still grew by 1.2 million barrels a day, all with oil around $30 a barrel.
"Another widely held view is that OPEC production, other than Iran, will not grow as strongly in 2016 as it did in 2015. Although it is still early in the year, Iraqi output in January reached a new record, and it is possible that more increases could follow. Iran has ramped up production in preparation for its emergence from nuclear sanctions, and preliminary data suggests that Saudi Arabia's shipments have increased. Thus, another driver might be removed." - IEA Report
The IEA also dampened the idea of higher demand growth at low prices. It predicts that, after hitting a five-year high in 2015, oil demand growth will "ease back considerably" in 2016. The report noted slowing demand growth in Europe, China and the U.S. "Early elements of the projected slowdown surfaced in the fourth quarter of 2015," the IEA said.
"Another driver of bullishness is that oil demand growth will receive a boost from the collapse in oil prices to below $30/bbl. We retain our view that global oil demand growth will ease back considerably in 2016 to 1.2 mb/d - at 1.2% still a very respectable rate - but our analysis so far sees no evidence of a need to revise it upward. Estimates by the International Monetary Fund that global GDP growth in 2016 will be 3.4% followed by 3.6% in 2017 is heavily caveated with risks to growth in Brazil, Russia and, of course, slower growth in China. Economic headwinds suggest that any change will likely be downward." - IEA Report
OPEC production can only rise so much, however, especially as individual members have disagreements on how to approach supply strategies. If you look at the rig count globally, the U.S. is responsible for 50% of the decline since oil prices started collapsing. With U.S. production numbers just starting to roll over, it looks like the world may not need OPEC to balance the market. According to the IEA, however, that may just take a bit longer than most expect. With supply still growing last month in the face of $30 oil, 2016 may not be the year of a turnaround.
Rig counts
This article first appeared on GuruFocus.
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