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Shrinking supply of oil

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US prod chg aug16

The impact of lower prices and spending cuts is being felt, with total non-OPEC supply on track to drop by around 1 mbd this year.

The US is posting the largest declines, with July output at 8.5 mbd – nearly 1 mb below last year’s level. This means production growth year-on-year has shifted from +1.2 mbd to -1.0 mbd since last summer. Chinese output has dropped by 5% this year, and Colombia and Mexico are also seeing significant losses.

After two years of severe cuts in the rig count, US drillers are adding rigs. Since end-May the number of oil drilling rigs has increased from 316 to 396 – still significantly lower than the 672 rigs a year ago and 75% down from the peak in late 2014. US oil output will increase again as the rig count keeps rising, but the volatility in oil prices will likely slow the recovery. Many producers will want higher prices before they boost activity.

OPEC production has continued to grow through the downturn, but growth is slowing. Part of the increase is due to the return of former member Indonesia and Gabon. Supply from the remaining 12 members reached the highest on record (starting 1997) in July, an increase of 0.6 mbd on the year.

An OPEC deal to freeze output is not very likely. Saudi Arabia has indicated it could back an effort to stabilise oil market, but at the same time raised production to a record level of 10.7 mbd. Earlier this year, the Saudis refused to back an agreement without the involvement of Iran, which has been ramping up production since the lifting of sanctions.

Demand growth is slowing but remains above trend. Combined with the decline in non-OPEC production and the slowdown of OPEC growth, we should soon start to see a decline in the massive overhang of stocks.

Non-OPEC supply chg2016
Source: IEA/ Bayerngas
OPEC supply aug16


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