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OPEC Guide

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No sign of OPEC policy shift as low crude oil prices bite into supply

September 28, 2015 -- By Margaret McQuaile in London

OPEC's next meeting is just ten weeks away and, barring some unforeseen development, there's little sign of a policy change in the offing.

If anything, forecast declines in non-OPEC production may bolster Saudi Arabia's argument (assuming the kingdom doesn't have second thoughts) that the market share policy is working and must be allowed to continue to work.

A couple of weeks before OPEC's November 2014 meeting that launched the battle for market share, the International Energy Agency said US production growth was showing few signs of abating.

Falling prices might well trim investment in US light tight oil but any potential cuts would probably pale in comparison with gains in LTO productivity, it said at the time.

Analysis continues below...

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Back then, the agency forecast demand for OPEC's crude to average 29.2 million b/d this year.

Fast forward to the IEA's latest monthly report, released two weeks ago, and the picture is very different.

Demand for OPEC crude is now expected to average 29.7 million b/d -- 500,000 b/d higher than the figure forecast last November.

The increased forecast for the 2015 call on OPEC is due to the IEA's upwardly revised forecasts for world oil demand rather than to falling non-OPEC supply.

Table: IEA's revised estimates every month from Nov 2014 to Sep 2015

2015 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
World oil demand 93.6 93.3 93.3 93.4 93.5 93.6 93.6 94.0 94.0 94.2 94.4
Non-OPEC supply 57.7 57.8 57.5 57.4 57.4 57.4 57.8 58.0 58.0 58.1 58.1
Call on OPEC 29.2 28.9 29.2 29.4 29.5 29.5 29.2 29.4 29.3 29.5 29.7
2016 Jul Aug Sep
World oil demand 95.2 95.6 95.8
Non-OPEC supply 58.0 57.9 57.7
Call on OPEC 30.3 30.8 31.3
Source: International Energy Agency

In fact, the agency has also increased its non-OPEC supply projection for 2015 to 58.1 million b/d.

But a clear trend showing a rising call on OPEC and a falling off in non-OPEC supply has begun to emerge in the forecasts for 2016, the first of which were published in July.

World oil demand continues to grow in 2016, forecast at 95.2 million b/d in July and now at 95.8 million b/d in September.

But non-OPEC supply, projected at 58 million b/d in June and revised down to 57.7 million b/d in September, is declining.

And demand for OPEC crude continues to climb. In June, the IEA forecast the 2016 call on OPEC at 30.3 million b/d.

Two months on, the agency's revisions have taken the forecast up by 1 million b/d to 31.3 million b/d -- the volume Platts estimates OPEC to have pumped in August.

But it is in the second half of next year where the numbers look startling, with the IEA forecasting demand for OPEC crude at 31.8 million b/d in the third quarter and 32.2 million b/d in the fourth, some 1 million b/d higher than OPEC's current flows.

Good news for OPEC, it would seem, in terms of overall market share. But at what cost, especially to those members which, unlike Saudi Arabia and its Gulf allies, do not have the financial reserves to cushion the blow of low prices?

North Sea benchmark Brent, which had fallen to close to $45/barrel earlier in the year, appeared to have stabilized around $60-$65/barrel at the time of the June meeting and OPEC said in its communique that the sharp decline in prices had abated.

But it wasn't long before prices were heading down again, driven by a growing glut of supply and wider economic worries. Brent fell to a new six-year low of $42.23/b on August 24.

Brent is still below $50/b. Indeed, according to Goldman Sachs in a note last week, there's even potential for prices to slip to $20/b in the short term as global storage capacity fills in response to the supply glut.

However, this isn't the bank's base-case scenario, which sees Brent averaging $49.50/b next year.

US production will bear the brunt of the oil price decline, according to the IEA, which notes that a sharp decline is already underway, with annual gains shrinking from more than 1 million b/d at the start of 2015 to roughly half that level by July.

And, the IEA says, next year could see US light oil supply, the engine of US output growth, decline by nearly 400,000 b/d.

This means that, unless prices recover, OPEC's lower-cost producers may need to turn up the taps in the second half of next year to keep the market in balance, the agency says.

As always, it will fall to the only OPEC member with significant surplus crude production capacity to meet the call.

Saudi Arabia claims total capacity of 12.5 million b/d, giving it -- on paper -- almost 2 million/d of wiggle room above a record 10.56 million b/d pumped in June.

Of course, if the landmark nuclear deal between Iran and six world powers is finalized and implemented, Iran could be supplying a lot more crude by the second half of next year.

But the second half of next year is the best part of a year way and, as the past ten months have shown, a lot can happen in the interim.

Next article: OPEC faces up to new oil price reality; Badri says era of $100/b is gone

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