Indeed, even before the further swoon in oil prices in December and January, US shale oil production declined by an average of nearly 90,000 b/d per month (and at an accelerating rate) in the six months to November, so, in our view, it is likely that OPEC’s forecast for US production will soon be revised significantly lower.
Chart 4: US shale oil production vs rig count
The removal of most sanctions against Iran will, of course, increase global oil supplies. Iran is currently producing about 2.8m b/d and has official capacity of 2.9m b/d. It is estimated, though, that Iran currently has 50m barrels of oil in storage (down from 70m a few months ago), which indicates that excess supplies have already impacted the market. Furthermore, the Iranians have stated that within a year they will be able to increase production back towards the 3.8m b/d that they were producing before sanctions were introduced.
The fear of this upcoming supply has already contributed to declining oil prices, but the US Energy Information Administration (EIA) disputes this estimate and believes that 600,000 b/d of additional production is more realistic at end 2016, as the country’s old oil fields naturally deplete at a rapid rate and as the lack of regular maintenance has taken its toll.
Chart 5: Iran oil production (‘000 b/d)
Assuming, as we do, that OPEC ex-Iran production for 2016 is unchanged from 2015 and Iran adds an average of 600,000 b/d (assuming additional production ramps up towards 1m by year end), then, given stronger global demand, the oversupply of oil in the market would decline from the current 2m b/d to 600,000 b/d.
Moreover, if Iranian production increases are disappointing (as we believe is likely), the US production decline is larger than expected, or global demand growth actually trends above current expectations (as it did for 2015), the market could be even close to fully balanced by the end of the year. In our view, even if the market remains in slight surplus, it should be positive for crude oil prices from their currently depressed levels.
Recent US Policy Changes
Despite the numerous headlines in the media, the recent end of the crude oil export ban in the U.S. is likely to have minimal near-term impact on the global balance. Given the costs associated with transporting crude oil from the U.S. to Europe and Asia, and that both benchmark grades of Brent and WTI currently are priced nearly equally, it seems unlikely that the removal of the ban will encourage U.S. supply growth or increase demand for US crude oil. In fact, given the surplus in global supply and the minimal storage capacity outside the US, it seems likely the US will remain a net importer of crude oil. Some potential impacts of the lifting of the ban are less seasonal volatility in Brent-WTI spreads and increased incentive to build pipeline infrastructure from the Midwest to the East and West coasts.
OPEC vs the IEA
Given the data presented above it may seem quite strange to read recent headlines from the International Energy Agency which is quoted as saying that, “the oil market could drown in over supply.” Presumably it is looking at very different data or has wildly different forecasts? The answer to that is no. In 2016 the IEA expect world oil demand to grow by 1.2m b/d to 95.7m b/d whilst they expect Non OPEC supply to drop by 0.6m b/d so it is also expecting a significant draw on OPEC supply.
