Divided oil world
The global crude supply landscape has transformed over the past two years, bringing some blessings and many curses for producers
Opec's decision in November 2014 not to cut production—one it has maintained at every meeting since—sparked a global output free-for-all, sending oil prices down in the process. Almost two years on, ahead of another unofficial Opec meeting in Algeria, Brent wasn't even able to sustain a price at $50 a barrel, its inflation-adjusted level since the 1970s.
Demand is hardly roaring ahead, but the real culprit remains too much supply. In August, global oil production was 96.9m barrels a day—just 300,000 b/d less than a year ago. That's hardly the kind of supply retreat anyone expected when prices started to crumble. The relentless nature of the supply glut continues to thwart forecasters. In January, the International Energy Agency (IEA) said the market would be around 1.5m b/d oversupplied in the first half of the year. It later reduced this estimate to a supply overhang of around 0.8m b/d and said a tightening was on the way. In September, it noted a new "slump" in demand alongside a continued expansion of supply. Consequently, OECD stocks are "swelling to levels never seen before".
Where has all the extra oil come from? In mid-2014, Opec's combined output was 30.03m b/d, as production gains from Saudi Arabia, Iran, Nigeria and Angola offset lower Iraqi volumes.
Two years later the group was pumping out record volumes and had increased its market share by around two percentage points, reaching just over 37%. In August, the group's output reached 33.47m b/d, about 450,000 b/d more than the call on its crude.
Middle East producers have sustained record levels, led by Saudi Arabia, post-sanctions Iran and Iraq. In short, members are producing as much as they physically can. Only Libya's and Nigeria's outages, and Venezuela's decline, are preventing group output from topping 35m b/d.
But, as our infographic shows, outside Opec, fortunes have been truly mixed. The slump is biting some - exactly as the group might have hoped - but production from others remains stubbornly high.
US crude production was 8.7m b/d in June, down from 9.4m b/d in the same month two years earlier. But Russia's output has bumped along between 10.7m and 10.85m b/d for most of the year, defying analysts who expected the country's production now to be wilting under the strain of low prices and sanctions. Norwegian production remains strong; Canada's steady; and China's keeps sinking.
It all leaves the "re-balancing" - the industry word now spoken as much in hope as expectation - constantly a couple of quarters in the future. Stocks remain too high for a swift price recovery, and refiners are hardly scrambling to take advantage of the cheap feedstock.
So a rise in oil prices looks implausible for now - not unless Opec and other producers can engineer some kind of cuts. That, after all, is what is needed. In a supply-led price slump, where demand is not high enough to soak up the excess, a fall in production needs to do the job. The past two years have involved a lot of pain, all for the sake of Opec's meagre two-percentage point rise in market share.
Since emerging from international sanctions in January, the Islamic Republic has steadily increased its crude production and regained its place as a major oil exporter to Europe and Asia. Iran's oil output increased by more than any other Opec member in 2016, reaching 3.64m b/d in August. That's up from 2.8m b/d in June 2014. Tehran wants output of 4m b/d, or roughly its level before sanctions, as soon as possible. By 2021, state company Nioc says output will reach 4.8m b/d. Analysts say 4.5m b/d is plausible within a decade, but only if Iran manages to secure billions in foreign investment to boost recovery rates from ageing oilfields.
While Iran was subject to international sanctions, neighbouring Iraq managed to muscle in on some of the country's oil-market share. This year alone Iraq has added around 0.6m b/d to its output, which reached 4.35m b/d in August. That's up from 3.26m b/d two years earlier. But Iraq may struggle to raise output. Iraqi prime minister Haider al-Abadi has been struggling to placate a popular challenge while the country's oil ministry has been rudderless since minister Adil Abdul-Mahdi resigned in March. Capacity constraints are also hitting. Iraq is now trying to eke out more upstream work at a time when global energy investment has slumped.
Far from hitting a 2.2m-b/d output target this year, Nigeria's entire onshore production has been mired with militant attacks on oil infrastructure. Attacks on pipelines and destruction of other infrastructure cost Nigeria its place as Africa's largest oil producer this year and pushed output to a 20-year low of just 1.37m b/d in May, just as the country needed income. The oil-price rout helped to push Nigeria's economy into recession in the second quarter of this year and inflation has been rapidly rising. By August, the country's output had picked up but was still about 430,000 b/d below its June 2014 level, at just 1.46m b/d.
The kingdom has been on a flyer—flexing its output muscle just as others struggle, and helping to drive prices down in the process. Output reached a record 10.6m b/d in June, helped by domestic peak summer demand while sustaining high export levels. This is up from output of around 9.78m b/d in June 2014. In 2016, the kingdom ripped up its own rulebook by selling a cargo of crude on the Asian spot market for the first time. Throughout former oil minister Ali al-Naimi’s tenure, Saudi Arabia only sold to blue-chip buyers, and rarely on the spot market. It signals that the kingdom is expanding beyond its state-owned customers, catering for new buyers who want more flexibility. And until Saudi Arabia agrees to some kind of supply cuts, production will remain high—reminding the oil world who is in charge.
Nowhere has been hit harder from the oil price crash than Venezuela. The country's oil-dependent economy was already in perilous shape with crude prices at close to $100/b thanks to years of wasteful mismanagement of tens of billions of petrodollars. When crude prices crashed below $30/b at the beginning of this year, Venezuela's finances went into meltdown and its output crashed. By August, output in the country with the largest oil reserves in the world had tumbled to just 2.14m b/d-a fall of 300,000 b/d from two years earlier.
After peaking in April last year at 13.24m b/d, US liquids output-including natural gas liquids-has been falling steadily as capital spending cuts cripple upstream activity. By August, liquids production had fallen to 12.52m b/d-a fall of 320,000 b/d from a year earlier. (Crude was down to 8.7m b/d.) The US onshore rig count had more than halved by the end of June, from a year earlier, down to just 400, according to Baker Hughes, but has begun ticking up again since then. The IEA says the country's shale industry, which has helped output soar over the past decade, would need around six months to pick up again after the downturn but that will depend on international and domestic crude prices breaching $50/b for a sustained period. Output from the country's six most prolific shale plays was 4.84m b/d in June-a drop of 118,000 b/d from a year earlier.
Russia's liquids output has borne the pain of the oil-price crash better than many others. The country has withstood lower prices, international sanctions and the devaluation of the ruble to become non-Opec's largest source of supply growth this year. Russian liquids output in June was 11.2m b/d, up from 10.9m b/d two years ago but it may not last. (Crude has stayed between 10.7m and 10.85m b/d for most of 2016.) The devaluation of the ruble has boosted export-oriented companies like oil and gas producers but firms concentrated on the domestic economy and those relying on expensive imports have suffered. How long can it keep production high? Few analysts are now willing to call time on Russian output resilience any longer. An easing of sanctions, if that happens, may even bring more upstream activity.
The country's crude output tumbled this year as maintenance and havoc-causing wildfires in northern Alberta took their toll. Albertan oil production fell by 330,000 b/d in May, according to the IEA, while synthetic crude oil output was hit by scheduled maintenance at several of the region's upgraders. The province's synthetic crude oil output fell by almost 1m b/d in March, to a five-year low of just 0.62m b/d. Total crude output plunged to 3.46m b/d in May as oil sands producers were forced to shut in 1.3m b/d for most of the month and much of June because wildfires raged across northern Alberta. By June, output had gained over 300,000 b/d, reaching 3.74m b/d but production remained well below the 4.17m b/d Canada achieved two years earlier. Oil sands plants that were launched when oil prices were higher should keep adding capacity for the next 18 months, but the pipeline of projects after that looks dry.
China's crude production has fallen over the past few years as maturing oilfields slow. By July, crude output was just 3.94m b/d, down from around 4.3m b/d two years earlier. Next year, China's crude production is expected to average just 4m b/d, but that may be optimistic. Beijing's record-breaking buying of crude oil will likely slow from September as its strategic storage tanks near capacity and domestic demand growth slows. China's oil products exports increased by 30% in the first half of this year, buoyed by higher government quotas and weaker consumption. Between January and June, China exported 170.85m barrels of oil products, according to the Joint Oil Data Initiative. That's 51.1m barrels more than in the first half of 2015.
Despite grappling with political scandal and financial woes, Brazil has managed to increase its crude production since mid-2014. In June, output was 2.66m b/d, up from 2.35m b/d two years earlier. The country's finances tanked along with commodity prices, plunging the country into its worst recession for a century. The economy contracted by 3.8% in 2015, and the IMF expects a similar decline this year. Petrobras has slashed capital spending by around $2.5bn so far this year alone, to reduce its burgeoning debt. In the first half of this year, Petrobras invested around $7.4bn-mostly on upstream projects-down from $12.2bn in the first half of last year.