OPEC, Non-OPEC Global Oil Supply

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The 13 OPEC countries produced about 36.4 MMbbl/d of crude oil and condensate in 2016, the highest in the past several years. Threatened by the U.S. shale boom, the group led by Saudi Arabia decided to fight for market share in 2014, resulting in an industry downturn as oil prices completely collapsed.

As the oil price rebounded from historical lows earlier last year and U.S. shale oil output continued to drop, it seemed OPEC’s strategy of fighting for market share had finally started working, even though it took much longer than the industry expected because of the resilience of non-OPEC production, especially U.S. shale.

As the group saw the supply and demand rebalancing via market force, it is widely believed that OPEC will continue its policy of not cutting or freezing production. However, as the oil price recovered to about $40/bbl to $50/bbl, U.S. shale found life and reversed the trend of decline beginning in the second half of 2016.

OPEC, led by Saudi Arabia, finally gave up the fight for market share and reached a production cut deal in November 2016 to address the chronic global oil glut in order to boost oil prices. As Iran seeks to resume its market share to pre-sanction levels, and Libya and Nigeria look to resume their production loss due to disruptions, those three countries were exempted from the cut.

The remaining 10 OPEC members participated in the deal along with 11 non-OPEC countries led by Russia. The 10 OPEC members pledged to cut about 1.2 MMbbl/d while the non-OPEC participants planned to cut 600,000 bbl/d starting from 2017 for six months. In May 2017, OPEC and its allies decided to extend the production cut for nine months to first-quarter 2018. Compliance to the first cut was surprisingly high; therefore, we are expecting a decent level of compliance for the second cut period.

The production cut deals are expected to mitigate the global oil supply glut to a certain degree. As a result, OPEC production in 2017 is expected to drop by 600,000 bbl/d. However, the recovery of the U.S. shale production, along with production growth from Iran, Libya and Nigeria, will cancel off part of the cut efforts. In addition, since the cut is not likely to continue through 2018, we expect that most of the OPEC countries would ramp up production starting from 2018 to compensate the impact of production cut.

Non-OPEC crude oil and condensate production increased significantly from 43.7 MMbbl/d in 2010 to 47.7 MMbbl/d in 2015. U.S. shale, Canada oil sands, Brazil deepwater presalt and China onshore oil fields were the main sources for the non-OPEC production surge in the period. In 2014 a supply glut sent the oil market off balance, which triggered the collapse of oil prices in the last few years. The massive investment cuts from oil companies around the world did not effectively remove the glut in 2015.

From 2015 to 2016, however, non-OPEC production dropped by 1.1 MMbbl/d to 46.6 MMbbl/d as market started to rebalance. The production drop for non-OPEC countries during 2016 mostly came from the U.S. and China.

We expect that production from non-OPEC countries will start to slowly recover in 2017, mainly driven by strong shale production in the U.S. facilitated by the recovering oil price. Newly completed oil sands projects in Canada and presalt plays in Brazil will also play roles in the turnaround.

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