Opec needs to lift output in next 5 years to balance market: BAML
February 08 2016 11:24 PM
KRISHNAN
Opec may have to provide the incremental barrels as demand will grow by 5.9 mbpd in 2015-20

By Santhosh V Perumal/Business Reporter

Opec needs to increase production by 4.1mn barrels per day (mbpd) in the next five years to “balance the market”, according to Bank of America Merrill Lynch (BAML).
Moreover, the structural shift toward a lower price environment will have “profound and long-lasting consequences” for non-Opec production, BAML said in its latest report.
Highlighting that with the US, the only country able to ramp up its production materially in non-Opec by 2020, it said Opec (Organisation of Petroleum Exporting Countries) may have to provide the incremental barrels as demand will grow by 5.9 mbpd in 2015-20.
“With the market oversupply of 1.8 mbpd in 2015, we estimate that Opec needs to increase production by 4.1 mbpd in the next five years to balance the market”, it said.
Saudi Arabia can make up for half of this given its 2.1 mbpd of spare capacity, and BAML believes it intends to at least increase its market share. Other Opec countries will expand their capacity in the next five years, namely Iran, the UAE and Nigeria.
As for Libya, the current turmoil needs to come to an end, while the scale of any Iraqi long-term output increase remains the biggest uncertainty, it said.
Elaborating on the structural shift towards a lower price environment and its profound and long lasting consequences for non-Opec production; BAML said Opec’s decision in November 2014 to let prices fall in order to regain market share from non-Opec suppliers, namely US shale, is now starting to pay off.
Non-Opec production growth peaked in the fourth quarter of 2014 at 2.7 mbpd year-on-year, or 4.9%, the highest rate ever recorded, driven largely by the US. Since then, growth has faded and reached only 0.2 mbpd in the same quarter of 2015, and production is poised for an outright annual decline this quarter.
Finding that global oil and gas capital expenditures (capex) dropped by 26% in 2015; it said “we expect another round of cuts this year to the tune of 10% globally.”
Capex is a function of prices, and with prices recently below the $30 mark, the actual 2016 cut is “likely to end up larger than these expectations”, it said, adding some companies have started to unveil their 2016 plans and it seems that US producers are keen to cut as much or even more than last year.
“With largely reduced activity, many producers now see their 2016 production declining. Meanwhile, non-Opec non-shale output should start to feel the pain in 2017, as the full investment cycle is around three to five years,” according to the report.
Observing that lack of current capex also leads to higher decline rates from mature fields; BAML said not only has the list of upcoming new projects already slimmed down, but current production from mature fields is also set to decline at higher rates as maintenance capex has been cut too.
In this regard, it noted that the UK decline rates accelerated from 9% in 2013 to 11% in 2015. The same story applies to other non-Opec countries such as Vietnam, Australia, Norway, Mexico and India.
In contrast, decline rates in countries like Russia are holding up much better at this point, a trend that is likely to reverse, in BAML’s view, unless spending resumes.
“In aggregate, our weighted non-Opec production decline rate analysis suggests an average jump of nearly 0.6ppt, from 4.2% in 2014 to 4.8% in 2015, a level consistent with decline rates observed in 2008 and 2009”, it said, adding net, total non-Opec supply is set to decrease to 56.4mbpd in 2017 before rebounding to 57.5mbpd in 2020, close to 2015 production levels.






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