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OPEC Reverses U.S. Outlook, Now Sees Oil, Liquids Production Declining in 2016

U.S. crude oil and natural gas liquids production in 2016 may reverse for the first time in years, OPEC said Monday in its monthly forecast report, a reverse from what analysts predicted one month ago.

Domestic oil/liquids production now is seen declining in 2016 by 100,000 b/d, or around 13.5 million b/d. The latest forecast reverses the monthly outlook for September, when the cartel's analysts predicted U.S. output would increase by 220,000 b/d in 2016 (see Shale DailySept. 14).

The U.S. Energy Information Administration last week in the Short Term Energy Outlook also said total domestic crude oil production should decrease through mid-2016 before growth resumes, ending the year down year/year almost 400,000 bbl (see Shale DailyOct. 7).

OPEC analysts reviewed oil supply trends outside of the cartel, mostly centered around U.S. unconventional production and the Americas. U.S. liquids production is expected to contract through the end of this year and continue the slide into 2016. Data for the first six months of this year indicated non-OPEC supply rose by 1.77 million b/d year/year, before dropping to 0.42 million b/d in 3Q2015. Last year, oil supply outside of OPEC witnessed a record-high growth of 2.24 million b/d.

The Americas in 2014 "saw the highest output of all regions with an increase of 1.92 million b/d," much from unconventional resources, OPEC noted. "Actual data for the first half of this year shows non-OPEC supply grew by 1.77 million b/d, before dropping to 0.42 million b/d in the third quarter, according to preliminary data."

The declining trend mainly is driven by low oil prices, down by about half from 3Q2015.

"As a result, the oil industry has experienced a rapid fall in global upstream spending, down by more than 20%, with North America cutting as much as 35%," the OPEC report noted. "This has led to lower activity -- less drilling and the delay or cancellation of new projects -- which has put pressure on production growth. Moreover, the current price environment has incentivized the entire oil industry to become more efficient and cost effective."

In 2016, more upstream projects outside of OPEC nations are expected to be postponed or canceled, "resulting in contraction of 0.13 million b/d in non-OPEC supply." U.S. oil supply in 2016 is expected to decline by 100,000 b/d, while production in the Former Soviet Union, Africa, Middle East and developed European nations also is forecast to fall. Brazil's output is projected to increase, although at a slower pace as projects are deferred.

"The 2016 forecast for non-OPEC supply is associated with a high level of uncertainty," OPEC analysts noted. "Oil price fluctuations and technical challenges -- such as unplanned shutdowns and sharper-than-expected decline rates -- along with geopolitical conditions could affect non-OPEC supply in the coming year."

The increase in oil supplies outside of the cartel during 2014 was more than twice that of global oil demand growth, but "this relationship is expected to flip this year before widening further in 2016 so that world oil demand growth exceeds the change in non-OPEC supply," said analysts.  "Required OPEC crude in 2016 is expected to average 30.8 million b/d, with the second half of the year reaching as high as 31.4 million b/d, resulting in more balanced oil market fundamentals."

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