Oil supply cutback ‘not yet over,’ says Oxford Economics

Oil supply cutback ‘not yet over,’ says Oxford Economics
By Jude Chan / theedgemarkets.com.sg | July 20, 2016 : 7:10 PM MYT

SINGAPORE (July 20): A recent bounce in oil prices might have eased pressure for cutbacks in oil supply, but the adjustment process may not yet be over given much lower investment and depressed margins.

“Overall, the supply-side for oil has reacted strongly to the slump in prices in 2014 and 2015,” says Oxford Economics’ Dan Smith in a research report.

“Growth is expected to slow, but should remain high compared with recent history. Emerging markets will remain a key driver of this, with lacklustre growth from the OECD countries,” he adds.

According to data from the International Energy Agency (IEA), China, Nigeria and the US saw the biggest cutbacks in oil supply in the first five months of 2016.

Output fell by 4% in China and 2% in the US in the five-month period, amounting to a decline of 0.6mb/day.

Nigeria also saw a sharp fall in oil output, mainly due to militant activity.

Smith says the relative resilience of the US is surprising. “Shale oil producers have not been as badly affected by lower prices as many experts thought they would be and productivity has soared,” he says.

China, on the other hand, has been “surprisingly sensitive” to the plunge in oil prices. According to Smith, leading producers like PetroChina have indicated that output is likely to drop by around 4% this year – the first significant decline since 1981.

“The reason for this change in trend is two-fold. First, the domestic industry is restructuring due to poor profitability, with high-cost fields being shut. And secondly, the impact of a longer-term strategy shift is clearly under way,” Smith says.

“We expect the oil market to swing into deficit eventually, but prices will be capped for now by the threat of higher supply and high inventory levels,” he adds.