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Brent stays balanced in face of mixed demand picture

The Brent crude market will remain balanced this year as growth in non-Opec supply will increase at a similar pace to global demand growth, industry leaders said

Michael Wittner, global head of oil market research at Société Générale, said global crude demand is expected to in-crease by 1.45 million barrels a day (b/d) this year while non-Opec production will rise by around 1.5m b/d. Last year, global crude demand increased by 1.25m b/d while non-Opec supply growth increased by 1.45m b/d. Wittner told the Platts Global Crude Oil Summit, held in London, that this  relative tightness in spare capacity would balance the effect of relatively flat demand growth.

According to International Energy Agency (IEA) figures for March, global crude production for the month  was 91.75m b/d. Non-Opec output fell by 300,000 b/d in March, to 55.7m b/d, because of declines from the Former Soviet Union, Europe and Canada, which more than offset a 200,000 b/d rise in US output.

David Fyfe, head of market research and analysis at oil trader Gunvor, told the summit crude markets had begun 2014 tighter than expected as North American supply growth had been offset by “anaemic growth from the rest of non-Opec”. He added: “This is not a market that looks slack or oversupplied,” Fyfe said. “Global oil supply is under performing by 2m-3m b/d.”

However, producers’ group Opec said that this year it expects non-Opec production growth to average 1.38m b/d, reaching 55.58m b/d. This will be driven by a 890,000 b/d boost in US tight oil output, a 200,000 b/d increase in Canadian oil sands output and a 150,000 b/d rise in Brazil’s deep-water and biofuels output.

Total North American oil output averaged around 18.08m b/d last year, up 1.35m b/d over the previous year. US oil production reached 11.18m b/d in 2013 - its the highest level since 1972. Despite expectations that North American output will continue to rise, the outlook for other non-Opec producers is bearish. Output in the North Sea is expected to continue declining while ongoing delays at Kazakhstan’s Kashaghan field – start-up has now been pushed back to 2016 – are likely to limit further growth in non-Opec supply.

However Antonio Merino, Repsol’s chief economist, gave a bearish outlook for long-term unconventional oil produc-tion because of decline rates of up to 70% for wells during the first year of production, and expectations that oil prices will increase in the long-term. He said: “If you consider unconventional oil will be the future for many years, then consider the cost. It’s a revolution but at what price? Even though you’ll have productivity increases for wells (over time), you’ll need more wells. I’m see-ing the marginal cost going up.” He added: “From what I can see from supply (forecast) curves, oil prices will go up and the incremental supply we’ll need will have to come from Opec.”

Assuming global crude demand increases at a rate of around 1.1m b/d between now and 2040, Opec will need to provide around 38.9m b/d to global markets, Merino said, up from around 30m b/d now. Opec oil output fell by 890,000 b/d in March, to 29.62m b/d, according to IEA data. This was driven by losses from Iraq, Saudi Arabia and Libya.

Amrita Sen, chief oil analyst at Energy Aspects, said supply outages from the Middle East and North Africa, particularly in Libya or Iraq, will take decades to return to pre-civil war levels. Sen said that with the exception of Saudi Arabia, the medium-term crude supply outlook for the Middle East and North Africa is limited. “The prospects for Middle East (crude) production outside of Saudi Arabia isn't very optimistic,” she said, adding: ”And as instability persists, Russian assertiveness grows.” Sen added that it would cost around $1bn to bring back the 1m b/d of output Iran has lost due to international sanctions. According to Opec data, Iraq’s crude output in April was 3.29m b/d while Iran’s reached 2.76m b/d.

Fyfe told the summit that for Iraq to ramp up its output to between 5m- 6m b/d over  the next 10 years would be an enormous challenge, while Libyan production would remain at less than 1m b/d for the foreseeable future.

Meanwhile, geopolitical tensions between Russia and Ukraine are not expected to disrupt crude flows to Europe. Wittner said the position Europe and Russia found themselves in was similar to “each holding a gun to the other's head” - Europe imports around 36% of its crude from Russia while Russia’s oil sales to Europe make up around 70% of its total. Disruption of Russian crude supplies to Europe would cause “mutually assured destruction”, Wittner said. He added that economic sanctions imposed on Russia by the US and EU were “a fairly meaningless slap on the wrist” and that they would not jeopardise the more than 4m barrels of crude oil and oil products Europe imports from Russia every year.

Meanwhile, industry leaders said that the global oil demand outlook for 2014 is mixed. In its latest oil market report, Opec said it expects global oil demand to increase by 1.14m b/d in 2014, reaching 91.15m b/d.

US crude demand growth had been strong this year. The country’s oil demand grew by 160,000 b/d during the first four months of 2014, reaching 19.1m b/d. This is expected to rise further, in line with economic growth projections. However, Wittner said this is a short-term trend as the US seeks to switch away from oil products in its transport sector to cleaner to cleaner-burning natural gas.

Jean-Michel Six, chief European economist at Standard & Poor’s, said the credit rating agency is seeing a shift in eco-nomic growth from emerging markets to developed ones. While Standard & Poor’s expects US GDP to grow by around 2.6% this year, Europe’s will lag. Opec expects OECD Europe’s oil demand to fall this year by 160,000 b/d. GDP growth in Russia and China is also expected to slow this year, denting crude demand.

The International Monetary Fund lowered its 2014 growth forecast for China to 7.5%, down from 7.7% last year. How-ever the IEA has retained its forecast of a 3.4% growth in Chinese oil demand this year, expecting it to reach 10.4m b/d.

However, the  IEA has cut its 2014 forecast for Russian oil demand by 55,000 b/d, to 3.5m b/d, following the coun-try’s annexation of Crimea. The World Bank also cut its forecast for Russian economic growth to 1.1%, down from 2.2% prior to the annexation. The agency also reiterated its global oil demand forecast for 2014 at 92.7m b/d as a 70,000 b/d increase in non-OECD Asian demand offset falls in Russian oil demand.

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