Syed Rashid Husain The world needs less oil from OPEC! With non-OPEC crude production on the rise – expanding at the fastest rate in two decades – the call on OPEC crude is getting lower. “The 2014 outlook . . . should give oil bulls some cause for alarm. Non-OPEC supply growth looks on track to hit a 20-year record next year, surpassing the 1.3 million barrels per day high reached in 2002,” the Paris-based IEA underlined in its just released July Monthly Oil Report. This growing, conventional and non-conventional, output outside the OPEC meant that the demand for OPEC crude will be about 1million bpd lower than the volumes it is currently pumping. As per IEA estimates, the need for OPEC crude would be just 28.85 million barrels a day in the first half of 2014, and about 29.4 million barrels a day for the whole year. Compared to the current OPEC production of 30.61 million bpd, this is almost 1.2 million bpd less. Simple mathematics indeed! And interestingly the IEA in its oil report also hints that some of this demand could also be satisfied by drawing oil out of inventories, adding a new dimension to the global energy debate. Indeed with global crude dynamics undergoing a major metamorphosis, the necessity of holding huge quantities of crude in strategic reserves is increasingly being questioned – all around. After all this comes at a cost. And any drawdown from strategic reserves would impact the overall call on crude – one could easily deduce. For a change, the OPEC too seems to be agreeing with the IEA on this count, conceding that the demand for its oil is likely to fall in the coming months and year. The Vienna-based OPEC too is now forecasting that demand for its crude in 2014 will be below its current 30 million barrel-a-day ceiling – by about 800,000 barrels a day for the first half of the year – and about 400,000 barrels a day lower across the whole year. While releasing its first outlook for 2014 last week, OPEC though pointed to the strongest oil demand growth in four years in view of the improving global demand, yet noted: “Incremental oil demand in 2014 will be less than the expected increase in non-OPEC supply.” And it would carry other implications too – impacting the global crude dynamics. “This would imply a further build in global crude inventories, which currently stand at high levels.” The drop in demand for OPEC crude will come as oil supply from countries outside the group is estimated to grow by between 1.1 million barrels a day and 1.3 million barrels a day in 2014, rising faster than global demand. Massive new discoveries in the US and indeed elsewhere have led to a “dramatic” change in global prospects. Antoine Halff, the IEA's head of oil markets, says forecasts (of non-conventional output) have had to be repeatedly revised upwards over the past two years, reversing the decline in US output – as oil extracted from shale and other new sources comes on stream with an increasingly greater gush. This has definitely moved the concern about an approaching “peak” in oil production “to the back burner,” Halff told the BBC News. “Just a few years ago, everybody thought US production was in permanent decline, that the nation had to face the prospect of continuously rising imports – and now the country is moving towards self sufficiency,” he underlined. “In the last few years, many forecasters have had to revise their forecasts upwards continuously –sometimes the ink was not dry on the previous forecasts before they had to raise their outlooks again,” Halff added, underlining the rapid changes in global crude mix. This is a very interesting and perplexing stage on the global energy outlook. What could the OPEC be doing to counter these ominous clouds on the crude horizon? When amid predictions of potential oversupply, the OPEC ministers opted in Vienna on the last Friday of May this year, to rollover its current output, markets were already sensing that the next move from producers' group, accounting for around 40 percent of global oil supply, might be to cut its output. That possibility seems more of a reality – now! OPEC could be forced to reduce its oil production by half a million barrels a day when it meets in December, the first cut in five years, as the latest forecasts show the US shale boom will dent demand for its crude next year, a Gulf OPEC delegate told Dow Jones. “Based on what the forecast says, we would have to cut,” said another Gulf delegate, regarded to have opposed, until recent past, any cut in output. A cut of about 500,000 barrels a day was likely to be debated at the December meeting, said another OPEC delegate from the Gulf region. Some consensus seems in the making! Another non-Gulf OPEC delegate told Dow Jones that any decision to reduce the group's ceiling would depend on where the global oil inventories stand in December. And though considerable time is still left before the OPEC oil ministers are required to take a decision on the issue, this OPEC delegate added that supply disruption risks – such as the political crisis in Egypt or recent Canadian floods – may deter OPEC from cutting its ceiling. Dow Jones report also underlined that another OPEC delegate opined that the group could also rule against a reduction if prices (continued to) remain above $100 a barrel. A number of variables to be taken into account indeed! Markets are soft, prompting calls for action from within OPEC. But before responding to any such calls, OPEC may need to weigh, not only the political fallout of any move, but also the medium- to long-term impact on economy and hence the global crude consumption pattern. OPEC needs to strike a balance. With emotions running high and the need for petrodollars on the rise, this may not be an easy task to accomplish. The issue at stake is also the ongoing battle to control the global crude markets. In a transformed world, is OPEC still relevant to the global energy equation? Can OPEC still influence the crude markets in a big way? These are all real questions. Many would like to write OPEC's obituary – at this very juncture. But OPEC has surmounted similar challenges before too. On more than one occasion, OPEC's obituary was written. Yet it bounced back. Could it be so this time too? It is still to be seen. Indeed OPEC is faced with a major issue – carrying strategic, long-term consequences to itself, the world and the global energy balance and stability. Let's wait. The outcome won't take too long!
