2013 was expected to be a year in which non-Opec (Organisation of the Petroleum Exporting Countries) supply expanded more rapidly than global demand, putting additional pressure upon Opec producers to cut back output. With Opec operating a "collective" 30 million barrels a day quota, this was expected to put significant pressure upon Saudi Arabia and the other Gulf Cooperation Council (GCC) countries within Opec to reduce output.
Non-Opec supply has indeed increased rapidly, led by sharply higher North American output. Even with the weakness of Brazilian and North Sea output, the increase in non-Opec production is close to 800,000 barrels a day. On the demand side, global oil consumption has risen only modestly, with strength in US and Chinese demand partially offset by weakness in Japan, India and Europe (in the first half of the year at least), leaving overall global demand rising by somewhere between 500,000-600,000 barrels a day.
This picture implies a drop in the daily call on Opec output of somewhere between 200,000 and 300,000 barrels a day, much as was expected by both the International Energy Agency and Opec in their forecasts for this year. This should have resulted in rising pressure upon core Opec countries to scale back their output in the face of falling oil prices and, indeed Saudi Arabia did cut its output sharply early in the year. Since then, however, both it and other core producers such as the UAE have gradually increased production back towards 2012 levels. The reason why the GCC members within Opec have been able to increase their production is the disappointingly low levels of output achieved by the "unconstrained" members of Opec. Iraq has failed to achieve any material increase in output. Libya has experienced a fall of up to 400,000 barrels a day, and other African producers have also suffered declines in output. The anticipated "pressure" upon Opec to reduce its production has therefore been achieved without any sustained cuts in its core members' output.
For much of the remainder of 2013, we would expect this situation to persist. Iraqi output will drop in September as maintenance is undertaken to enhance its export capacity. Libyan production looks likely to remain low as protests at ports continue to disrupt exports and output. Further, the scope for stronger Chinese and US demand is likely to provide additional support to oil prices. As a result, there should be relatively little pressure for lower oil prices over the remainder of this year.
For 2014, our initial estimates for the daily call on Opec output appear to suggest a broadly similar picture to this year. Non-Opec output is expected to increase by somewhere around 1.3 million barrels a day, led by another solid increase in North American output, and supported by a rise in production in Kazakhstan and potentially Brazil. Global demand is expected to rise by a similar amount, with strength in China accompanied by small improvements in the US. The rate of decline in European demand is likely to reduce significantly on the back of nascent growth in European economy. As a result, the overall call on Opec production is likely to reduce marginally to 29.6 million barrels a day in 2014.
For 2013, we forecast an average Brent price of $107.5 a barrel, implying prices in the range of $106-109 a barrel over the remainder of the year. It could slide slightly on the back of stronger dollar after Federal Reserve's announcement on QE tapering in the fourth quarter. For 2014, we would anticipate an average of $108 a barrel, balanced around downside risks if non-Opec and "unconstrained" Opec output improves more rapidly than we expect, versus upside risks if geo-political tensions rise further in the West Asia. If Iran and P5+1 nations find a solution to the dispute on Iran's nuclear programme, we could see oil price drop significantly.
The author is oil markets analyst, Natixis, UK
