Oil output set to contract for first time since 2013: BofAML
03 May 2016 - 3:04
By Satish Kanady
DOHA: Global oil output is estimated to contract year-on-year in May for the first time since the first quarter of 2013. The drop in supply is coming on the back of massive cuts in global oil and gas capex, Bank of America Merrill Lynch’s (BofAML) Global Energy report noted.
“Our new analysis points to non-Opec oilfield decline rates of 4.9 percent on average this year, up from 4.2 percent in 2014. However, as drilling rigs in non-Opec countries have been idled, the Middle East rig count has held steady”, the BofAML report entitled ‘The oil supply cliffhanger’ said.
True, there is still a large set of drilled but uncompleted shale wells that could come on stream over the next few months and we surely expect US companies to play a role in stabilizing non-Opec supplies. However, cartelized producers at the moment have limited spare productive capacity or planned investment to meet demand on a forward basis, leaving the oil market exposed to huge supply uncertainties over the next 5 years. To balance the oil market by 2020, BofAML equity research team believes US oil & gas capex will have to increase by at least 50 percent. Thus, BofAML sees the need for forward oil prices to trade meaningfully above the current forward strip and into a $55-70/bbl range.
Supply risks include Saudi behavior, unplanned outages. So BofAML sticks to its view that Brent will average $61/bbl in 2017. A key risk to this view is how fast Saudi and other GCC members decide to monetize their low cost reserves. For now, Aramco’s output is relatively flat compared to last year.
With Saudi leaders pulling out of the oil freeze deal in Doha last minute, the market keeps second-guessing their next move. Also, disruptions are relatively high at the moment, suggesting there is room for production to come back in Libya, Yemen, or Nigeria if politics allow. But low oil prices could also trigger strikes and unrest in producing countries. In short, if Saudi output remains constant, oil prices should trend higher. But don’t miss the next episode of this oil supply cliffhanger.
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
The string of twists and turns ahead of producer meetings in Vienna and Doha have helped turn developments in the global oil market into a serial drama. Yet non-OPEC oil supply is indeed hanging off a cliff. “On our estimates, global output set to contract year-on-year in April or May for the first time since 1Q13, mostly as a result of steep non-Opec supply declines. On our estimates, the countries experiencing the biggest declines this year include the US, North Sea, Mexico and Kazakhstan, and we see significant production declines next year in the North Sea, Mexico or even Russia.”
It’s true that Opec production has continued to increase but it is no longer offsetting the steep output declines observed across non-OPEC. Moreover, while some Opec players have continued to grow output in recent months, maximum production capacity in Iran is set to be reached soon and BofAML sees limited scope for further increases until Iranian leaders can manage to attract fresh capital and technology to their ailing industry. Meanwhile, Saudi and Iraqi production has recently flattened out and unexpected disruptions in Nigeria, declines in Venezuela and UAE, are all likely to limit OPEC supply growth next year.
BofAML expects most companies to be focused on maintaining a lid on capital expenditures and repairing their balance sheet. According to its latest estimates, derived from the previous round of earning announcements, indicate that global oil & gas capex will decline by 16 percent this year compared to 2015. Around the world, the oil rig count has fallen by 31 percent since October 2014. The only region where the oil rig count has been roughly unchanged in the past 18 months has been the Middle East.