Blame Canada, Norway and Kazakhstan - OPEC warns oil markets will remain oversupplied well into 2017
OPEC changed its tune this month and is now warning the current oil glut won't be resolved any time soon. In their latest Monthly Oil Market Report, the agency warns that economic growth remains weak in the US, Japan and the Eurozone while supply will be higher than expected thanks to new projects coming online and better than expected production out of Norway.
OPEC produced an estimated 32.75 million bbl/day in the second quarter of this year, but that has since increased to 33.2 million in August. Those numbers are down slightly from the previous month due to declines in Libya, Nigeria and Venezuela. OPEC's share of world oil production now sits at 34.7%.
Non-OPEC supply is expected to contract by 610,000 bbl/day in 2017 to an average of 56.32 million bbl/day. Figures for 2017 were revised higher by 350,000 bbl/day to an estimated 56.52 million bbl/day. OPEC had previously projected a 150,000 bbl/day decline in output next year but an early start of the Kashagan field has forced an upward revision.
The massive Kashagan oil field in Kazakhstan is mostly to blame for the continued oversupply. The basin was discovered in 2000 in the northern part of the Caspian Sea, which is subject to extreme temperature variations (from −35 to 40 °C). Kashagan holds an estimated 13 billion barrels of recoverable oil and is being developed by a consortium that includes Eni (16.81%), Shell (16.81%), Total (16.81%), ExxonMobil (16.81%), KazMunayGas (16.81%), China National Petroleum Corporation (8.4%) and Japan's Inpex (7.56%). The project has been plagued by a series of operational and management issues, which has delayed production for several years.
But the mega-project is finally expected to get off the ground later this year, with an initial production of 90,000 bbl/day, ramping up to 370,000 bbl/day by the end of 2017. The price tag? Officially, about US$50 billion but other sources put the figures closer to US$100 billion, making it one of the most expensive oil developments in history.
Canada not helping either
OPEC expects production out of Canada to improve through the second half of 2016, averaging 4.44 million bbl/day. The production figures were revised higher by 20,000 bbl/day.
Canada is expected to be the third largest source of non-OPEC supply growth in 2017, expanding by 180,000 bbl/day to average 4.61 million bbl/day. The growth will come from improved production out of Surmont 2, Christian Lake, Sunrise and Kearl, as well as Husky's new thermal oil start-ups at Edam East, West and Vawn.
That all assumed Fort Hills, which has a capacity of 180,000 bbl/day, doesn't start-up by the end of next year.
OPEC nudged world oil demand up to 94.27 million bbl/day, an increase of 10,000 bbl/day from the previous estimate. Strong gasoline consumption in the US is helping support those figures. In contrast, demand for refined products in Canada is actually falling due to the weaker economy.
World oil consumption is expected to average 95.42 million bbl/day next year, led by growth in China, India and the US.
By OPEC's accounting methods, oil markets are currently oversupplied by about 1.30 million bbl/day, headed into the second half of the year. Assuming OPEC production remains unchanged at the current 33.2 million bbl/day, oversupply in 2017 will shrink to 700,000 bbl/day.
However, that assumes production from Iran, Venezuela and Nigeria doesn't meaningfully recover next year. The cartel's next informal meeting will be in Algeria later this month. Hopes for a production freeze have already been thrown out the window. Instead, OPEC will ask its members for their respective production "ceilings", a move intended to give struggling members room to recover lost output.
August Average Oil Prices
- Prices FOB at port of export
- OPEC basket @ API 33° (light/sour)
- WTI = US West Texas Intermediate basket @ API 40° (light/sweet)
- Canadian Light @ API 40° (light/sweet)
- WCS = Western Canadian Select @ API 20° (heavy/sour)
- Venezuelan Merey @ API 16° (heavy/sour)
- Iran Heavy @ API 30° (medium/sour)