 "Abhishek Deshpande")
For global demand, improvements in 2015 have been substantial and the near-term outlook is good. Demand in the key OECD (the Organisation for Economic Co-operation and Development) regions has been excetional, reversing several years of declines. We expect demand to increase by 1.7 million barrels per day (b/d) in 2015 and 1.4 million b/d in 2016. However, there are several clouds on the horizon which might impact demand growth, such as the potential slowdown in China and any other emerging markets.
For non-Organization of the Petroleum Exporting Countries (non-Opec) production, the star performer of 2014, the US, has begun to struggle as we predicted earlier this year, although production is not falling aggressively yet and we have considered a moderate decline in US production in our balances.
Oil production from other key non-Opec oil producers in South America, Europe and Russia has not been impacted in 2015 and we expect little or no change in their production in 2016.
The capex cuts announced at the beginning of this year have continued, and for the companies we follow currently stand in excess of $167 billion, an average cut of 25 per cent versus 2014 budgets, although producers in the US are facing larger cuts on the whole, averaging 31 per cent year-on-year (y-o-y). We believe most of these cuts will impact production from 2017 onwards.
Opec production levels have continued to remain elevated in line with our expectations. Opec produced 31.38 million b/d of crude oil in October, a decrease of 190,000 b/d month-on-month. Saudi Arabian crude output was close to 10.13 million b/d in October. Saudi Arabia, Iraq, Iran, UAE and Angola have all increased output in 2015, with Iraq increasing production by 24 per cent y-o-y in October. Output increases in all these nations have been steady and relentless (with the exception of Angola, which has experienced field level production issues), as these countries have begun to compete with each other following Opec's paradigm shift. This competition is not only evident through the increases in production volumes but also in aggressive pricing. OSPs (official selling prices) have been cut on several occasions to key markets, such as Asia by Saudi Arabia, Iran and Iraq. The market share battle between Opec and Russia also intensified, as Saudi Arabia cut its OSPs to Europe. Additionally, Iran looks set to return to the market in the coming months, with suggestions sanctions will begin to be lifted in January 2016. Based on the fundamentals, we expect markets to remain in excess until at least the end of 2016, averaging well above one million b/d for the year as a whole.
We have kept our forecast unchanged from September. We expect Brent to average $46/barrel in the fourth quarter of 2015 and around $48.5/barrel in 2016.
Given the amount of excess in the market, and the continued resilience shown by US oil producers alongside the Opec market share strategy, we could see crude oil prices dipping below cash costs of production for a brief period, especially if oil needs to be stored on floating storages. We see oil prices recovering to close to $54/barrel towards the end of 2016 if there are no significant changes to the fundamentals or geopolitical risks we have considered in this analysis. In the first and second quarters of 2016, we can see Brent averaging $44/barrel and $46/barrel, respectively, before recovering towards the end of the year to $54/barrel.
Aside from our central scenario, we have a high-case scenarios if non-Opec (especially US) production declines aggressively (high case) or Opec decides to make any cuts.
The author is lead oil markets analyst, Natixis Commodities Research, London
