The current glut in world oil markets is likely to persist well into 2016 as oil prices have again collapsed to sub-$50 per barrel levels, QNB has said in a report.
According to the report, a bear market in Chinese equities has shaken confidence in the global growth outlook, and oil markets have been surprised by continued increases in global oil output despite lower oil prices.
From 2017, as producers and consumers adjust to lower prices, oil markets should begin to tighten, leading to gradually firmer prices. As a result, QNB forecasts oil prices to average around $55 a barrel in 2015-16 before rising to $60 in 2017.
Oil prices rallied 45.5% during the first half of the year, mainly driven by improving expectations for global growth. Subsequently, prices have lost almost all the gains, falling back below $50 at the beginning of August. A mixture of supply and demand factors was behind the recent drop, the QNB report said.
The weaker demand picture was mainly driven by concerns about global growth emanating from China. The largest drops in oil prices were at the beginning and end of July as sharp selloffs in Chinese equities triggered concerns about potentially negative knock-on effects on the real economy. China is highly important for global oil markets, QNB said. On August 3, oil prices fell 5.2% after disappointing manufacturing data was released in China. Looking at the overall global picture, the International Monetary Fund (IMF) revised down its 2015 forecast for world GDP growth by 0.2% to 3.3% in July.
On the supply side, the agreement to remove international sanctions on Iran and persistent increases in global production has further weakened the outlook for prices. An Iranian nuclear agreement was initially announced in April with the final details made public on July 14. Assuming international sanctions are lifted in the next few months (ratification by the European Union, the US, and Iran itself is still required), Iranian production would increase, QNB said.
Elsewhere, supply has increased. Saudi Arabia’s production rose to a record 10.3mn bpd in July, according to the International Energy Agency (IEA). Production is also rising in other Opec countries, particularly Iraq (4.1mm bpd in June, up from 3.3mn on average in 2014). Total Opec production stood at 31.7mn bpd in July, up from 30.3 on average in 2014.
Opec made no changes to its production target in its meeting at the beginning of June, bolstering the outlook for supply. In the US, where high-cost shale oil producers were expected to be hit hardest by lower oil prices, production has been resilient, averaging 9.5mn bpd so far in 2015, compared with 8.7mn in 2014.
What does this mean for oil prices going forward? The latest report from the IEA suggests that world oil markets will be oversupplied by around 1.9mn bpd in 2015. Based on the IEA projections, QNB said it expects another supply glut in 2016 of around 1.1mn bpd.
Opec production should remain elevated, according to the report. Iran is expected to add around 0.7mn bpd to global production by the end of 2016 and Saudi Arabia is expected to maintain current output levels. Meanwhile, non-Opec production shows no signs of slowing down either, the report added.
The IEA expects US production to rise by 0.3mn bpd in 2016. Rising supply is likely to offset any pick up in global demand. As a result, QNB said it expects oil prices to remain broadly flat at around $55.5/b in 2016. The QNB report said: “One caveat to our supply outlook is the risk of supply disruptions from security or geopolitical factors, which could lead to higher than forecast prices.”
From 2017, oil markets should begin to tighten, leading to rising oil prices. In terms of supply, non-Opec producers will eventually be forced to cut back on investment in response to lower oil prices, leading to slower output growth. Production with higher costs is likely to be the first to be impacted, including shale oil in the US, oil sands in Canada, and offshore producers in the Gulf of Mexico and off West Africa.
The report said major oil companies have already reportedly cut back on $200bn of capex on new projects ($5.6bn in Canada, the worst impacted region), which will lead to lower future production growth. On the demand side, oil consumption is likely to increase in response to lower prices, mainly in emerging markets, and as global growth is expected to rise. Therefore, from 2017, slower supply growth coupled with rising demand should erode excess supply in global oil markets, leading to a gradual increase in oil prices to around $60, the QNB report said.