OPEC Cuts U.S. Oil Output Forecast as Price Rout curbs Drilling (OIL) (USO)

(Updated - February 9, 2015 7:02 AM EST)

OPEC cuts U.S. oil output forecast as price rout curbs drilling, according to Bloomberg.

OPEC also said world oil demand is projected to rise by 1.17 mb/d in 2015, slightly higher than in the previous report, mainly to reflect expectations of an uptick in oil requirements in OECD Americas.

UPDATE - More from OPEC's February 2051 oil market report:

Crude Oil Price Movements

The OPEC Reference Basket ended January down $15.08 or 25% to average $44.38/b, reaching its lowest value in six years as excess supply and weak demand continued to weigh on the crude oil market. ICE Brent ended January at $49.76/b, down $13.51 from the previous month. Nymex WTI lost $11.96 to stand at $47.33/b. The Brent-WTI spread narrowed to $2.43/b.

World Economy

World economic growth for 2014 remains unchanged, while the decelerating trend in emerging and developing countries has led to a revision in the 2015 forecast to 3.4% from 3.6%. OECD growth is unchanged at 1.8% for 2014 and 2.2% in 2015. China’s 2015 growth forecast has been revised to 7.0% from 7.2%, while India’s positive trend has lifted the 2015 growth forecast from 5.8% to 6.0%. Russia’s 2015 growth forecast has been revised from 0% to show a contraction of 2.4%, while Brazil is now expected to grow by 0.7% in 2015, compared to 1.0% previously.

World Oil Demand

Global oil demand growth in 2014 is expected to be around 0.96 mb/d, broadly unchanged from last month’s report. In 2015, world oil demand is projected to rise by 1.17 mb/d slightly higher than in the previous report, mainly to reflect expectations of an uptick in oil requirements in OECD Americas.

World Oil Supply

Non-OPEC oil supply growth in 2014 has been revised up slightly to 1.99 mb/d. This revision was mostly driven by higher output in OECD, Brazil, Kazakhstan and China in 4Q14, partially offset by downward revisions from Azerbaijan, Other Asia Pacific, Australia and Mexico. In 2015, non-OPEC oil supply is projected to grow by 0.85 mb/d, down 0.42 mb/d from the previous assessment. OPEC NGLs are forecast to grow by 0.20 mb/d to 6.03 mb/d in 2015. In January, OPEC crude production decreased by 53 tb/d to average 30.15 mb/d, according to secondary sources.

Product Markets and Refining Operations

Product markets strengthened in the Atlantic Basin in January. Lower refinery runs supported light and middle distillate crack spreads in the US, while export opportunities lent additional support to the European market. In Asia, product markets strengthened slightly in January, as limited supplies of naphtha and fuel oil allowed margins to rise, despite the pressure of increasing gasoline and middle distillate supplies.

Tanker Market

A general improvement in sentiment was seen in the dirty tanker market on the back of weather conditions, port delays and tight tonnage availability. Clean tanker freight rates improved East of Suez, but encountered a decline in the west, partially due to the weak medium-range tanker market. OPEC and Middle East sailings were higher than a month ago with arrivals in North America and West Asia increasing while arrivals in Europe and the Far East fell from the previous month.

Stock Movements

OECD commercial oil stocks declined by 18.5 mb in December to stand at 2,678 mb. At this level, inventories were 43 mb higher than the five-year average. Crude showed a surplus of 78 mb, while product stocks remained 35 mb below the five-year average. In terms of days of forward cover, OECD commercial stocks stood at 58.6 days, 1.7 day higher than the five-year average.

Balance of Supply and Demand

Demand for OPEC crude is estimated at 29.1 mb/d in 2014, unchanged from the last report. In 2015, required OPEC crude is projected at 29.2 mb/d, following an upward adjustment of 0.4 mb/d.

OECD Americas

US

The positive growth trend in the US continues, but most recent indicators suggest that the strong growth seen in the 2Q and the 3Q of 2014 is unlikely to be maintained. After a seasonally adjusted annualized rate (SAAR) of 4.6% q-o-q in the 2Q and a SAAR of 5% q-o-q in the 3Q of last year, the first estimated GDP growth rate for the last quarter in 2014, as provided by the Bureau of Economic Analysis, stood at a SAAR of 2.6% q-o-q. While this is still a solid number, it ties into many of the slightly weakening indicators of recent months. Industrial production, manufacturing orders and retail sales were all declining in December, which came as a surprise to many observers. This will need close monitoring in the coming months to see if these declines were merely temporary dips or if there are some more serious underlying challenges. One issue that emerged in the past several months was the low earnings growth within the labour market, with average monthly earnings in December declining by 0.2% m-o-m, the first decline since March 2014. However, the considerable rebound of 0.3% m-o-m in January, may suggest that this was a temporary dip.

In general, the US economy is improving, supported by the ongoing positive trends in job creation, rising house and equity prices, and other income-related factors that in the past year have led to rising consumption. This remains the most important driver of US economic growth. Depending on further developments in the earnings situation, rising private household consumption is forecast to lead to rising GDP growth in the current year. Personal consumption has stood at a SAAR of 3.2% q-o-q in the 3Q and 4.3% in the 4Q of last year. This could be taken as a positive sign of growth in 2015.

In its most recent Federal Open Market Committee (FOMC) statement, in which it sets out its decision on future monetary policy, the US Federal Reserve (Fed) has become more upbeat. The statement notes that the US economy is expanding at a solid pace and that labour market improvements are strong. It also notes that relatively lower energy prices are acting as a supportive factor for consumer spending. While these observations might lead to an interest rate increase at about mid-year, the current disinflationary trend and recently declining earnings growth – as well as falling lead indicators and output numbers – are all aspects that will be taken into consideration before any decision is made. In addition, as in the past, after this latest meeting the Fed has noted that it will also continue to observe international economic developments and consider the possible impact of an interest rate increase on the global economy before taking a final decision. Among these international developments is the swift rise of the US dollar against other major currencies, which would negatively impact US exports.

The labour market has significantly improved over the past months and the latest batch of data confirms this trend. While the unemployment rate increased slightly to 5.7% in January, non-farm payrolls grew by a stronger-than-expected 257,000 in January, after upwardly revised 329,000 non-farm jobs from December. The share of long-term unemployed declined to 31.5% in January and also the participation rate improved, rising to 62.9%. Moreover, seasonally adjusted hourly earnings recovered somewhat in January, growing by 2.0% y-o-y, comparing to 1.9% in December. On a monthly base earnings improved by 0.3% m-o-m, compared to the December decline of 0.2% m-o-m.

The housing market continues to recover and while the pace of the recovery was slowing in the past months, the rise in prices in November – the latest available data point – has been even higher at 5.3% y-o-y compared to October, when the rise in prices stood at 4.4% y-o-y, as reported by the Federal Housing Finance Agency. Existing home sales have also continued improving in December, growing by 3.5% y-o-y after a November level of 1.9% y-o-y.

Consumer confidence rose to a new record high of 102.9 in January, compared to 93.1 in December, based on the index provided by the Conference Board. A sign of deceleration, however, was apparent in the purchasing manager’s index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), which fell to 53.5 in January from 55.1 in December. The PMI for the services sector, which contributes more than 70% to the economy, edged up slightly to 56.7 in January from 56.5 in December.

Given the latest signals from output and lead indicators that the depth of the recovery in the current year remains, to some extent, uncertain, the GDP growth forecast for 2015 remains unchanged at 2.9%. However, this year.s growth forecast is already at a much higher level than the final growth estimate of 2.4% in 2014, as provided by the Bureau of Economic Analysis.

Revisions to the 2015 forecast

In addition to historical revisions, there were a few offsetting adjustments to the 2015 non-OPEC supply forecast. In the new forecast, following the bottom-up approach, a number of factors at current conditions were assumed; announced reductions in IOCs’ capex, revisions to some countries’ annual decline rate (ADR), geopolitics and US rig counts. Hence, the US total oil supply forecast for 2015 has been revised down by 130 tb/d, Canada by 20 tb/d, the UK by 20 tb/d, Colombia by 80 tb/d, Yemen by 60 tb/d, Russia by 60 tb/d and Azerbaijan by 40 tb/d, compared with the last MOMR.

US liquid production is anticipated to average 13.64 mb/d in 2015, indicating growth of 0.82 mb/d y-o-y, which is 130 tb/d less than the previous MOMR figure. Total tight crude output from US shale plays is expected to grow by 0.59 mb/d to average 4.46 mb/d in 2015. Unconventional NGLs will only increase by 50 tb/d, while most producers will favour moving their drilling rigs to dry gas production areas. Oil production from the Gulf of Mexico is expected to grow by 0.18 mb/d.

Tight crude producers are aware that typical oil wells in shale plays decline 60% annually, and this loss can be recouped only by drilling new wells. As drilling subsides due to high costs and low oil prices, production can be expected to follow, possibly late in 2015.

On a quarterly basis, the US liquids supply in 2015 is expected to average 13.60 mb/d, 13.70 mb/d, 13.65 mb/d and 13.62 mb/d, respectively.

You May Also Be Interested In

• Midday movers: Morgan Stanley, UnitedHealth rise; Tesla falls
• Limited upside to oil from current levels also suggests limited near term upside for Energy stocks - GS
• Quarterly corporate earnings, Chinese growth, UK wages - what's moving markets