For the oil industry, the most worrisome news coming out of the Middle East doesn’t involve geopolitics.
It’s well known by now that Iran wants to increase production by at least 500,000 barrels of oil per day (b/d) as the lifting of international sanctions allows it to resume crude exports.
But Iran isn’t alone.
Kuwait reportedly intends to increase its exploration efforts and is targeting a new offshore oil exploration program within two years. The manager of planning for Kuwait Oil Co. has been quoted as saying the country eventually wants to add a total of 700,000 b/d of oil production.
The United Arab Emirates (UAE) also has plans to add another 500,000 b/d of oil equivalent to its production within two to three years, according to Abdullah Nasser al-Suwaidi of the national oil company Abu Dhabi National Oil Company (ADNOC).
Given the chances for increased production in the Middle East, it’s surprising to some that analysts have such a benign outlook for the future of the crude oil market.
That’s partly because Iran’s oil minister has announced the country is “not seeking to distort the market” and will use caution in increasing exports.
Mainly, though, forecasters are looking at three expectations that will help rebalance crude oil supply and demand:
- Market forces will reduce supply from some areas as oil production becomes uneconomic at today’s low crude prices.
- Production will continue to drop from fields already in decline, with heavy investment in enhanced recovery unlikely.
- World demand growth for crude oil consumption will continue to increase over the next two years.
Numbers in projections are slippery by nature, but analysts generally agree on the supply-side calculations. Increased oil production from the Middle East appears to be a certainty. How much of an increase is the question.
“The wild card, of course, is Iran. Fairly soon we’ll start seeing how much they’re going to increase and for just how long,” said Paul Tossetti, crude oil markets director for IHS in Dallas.
IHS projects a modest overall increase in Middle East crude output over the next two years, possibly by 600,000 to 800,000 b/d. Tossetti said other countries in the region are unlikely to boost production by much.
“The Kuwaitis have a lot of trouble organizing their oil industry. Qatar is probably on decline for oil production,” Tossetti said.
“The only country other than Iran and Iraq on track for raising production is the UAE, but it’s going very, very slowly,” he added.
Iraq is a special case, where recent increases in production could be stymied by low oil prices.
“Their production over the past couple of years has risen somewhere between 600,000 to 800,000 barrels a day. That’s including Kurdistan,” Tossetti noted.
But reduced capital expenditures by international oil companies operating in Iraq and the likelihood of further investment reductions make additional big gains unlikely, he said.
On the higher side of estimates, Goldman Sachs began 2016 expecting Middle East oil production to grow more substantially, with Iran, Iraq, Kuwait, Saudi Arabia and the UAE together projected to add almost 1.33 million b/d in crude output.
That increase would be partly offset by production declines in other OPEC countries, especially Nigeria. However, as a result, Goldman Sachs predicted an overall OPEC crude oil production increase of about 812,000 b/d from 2015 to 2017.
And worldwide oil production growth will be even less, it forecast, as crude supply begins to decline from North America and non-OPEC Asia.
While Goldman Sachs has been negative on the oil price outlook, and proven correct, it has remained fairly positive on world oil demand growth. Goldman estimates total oil demand to grow to 97.13 million b/d in 2017, a jump of 2.6 million b/d from 2015.
Because demand growth is expected to outstrip supply increases, analysts are looking for a tightening world supply-demand picture to begin as early as the second half of 2016.
Future demand is key because there’s already been “substantial growth,” Tossetti said. So, you’ve already got that in your back pocket. That will be pivotal.”
A major factor determining crude production growth in the Middle East will be Iran’s ability and willingness to increase oil exports. Mohsen Qamsari, director general for international affairs of the National Iranian Oil Company, said the country would adjust output “according to the global market’s demand.”
“We will exercise great caution to prevent a further decline in international prices and will adopt certain methods and strategies to this end,” he added.
Political tensions between Iran and Saudi Arabia earlier in the year caused a very brief flutter upward in oil prices. But the more lasting effect is likely to be negative, according to the Macro Oils service of international consultancy Wood Mackenzie.
“Unless other producers such as Russia, Iran and Iraq agree to reduce their oil production, Saudi Arabia has consistently stated since the November 2014 OPEC meeting, it has no intention of cutting its supply to support oil prices.
“The current ramping up in tensions between Saudi Arabia and Iran only further confirms our view that Saudi Arabia is unlikely to cut its output to help Iran regain market share,” it said in a report.
Wood Mackenzie has forecast continued global oil oversupply in the first half of 2016, followed by a drawdown in crude stocks in the second half of the year.
At that time, “with this tightening in the supply and demand balance, political risk will become more important to oil prices,” it said.
Today’s low oil price environment constrains investment to boost or simply maintain production from the Middle East oil fields currently in decline, analysts note. That has affected Qatar, where one-time plans to push oil production from the prolific Al-Shaheen field above 500,000 b/d appear to have been derailed.
A potential change of operators could affect Al-Shaheen in the near future. Maersk Oil began developing the field in 1992, under a 25-year exploration and production sharing agreement that expires in 2017.
Qatar Petroleum has invited other international oil companies to compete to operate and develop Al-Shaheen, seen as a sign that negotiations to extend the current contract failed. The field, about 50 miles off Qatar’s coast, now produces around 300,000 b/d, according to Maersk.