The recently published 2015 Opec Annual Report gives a detailed review of its activities and. more importantly, a post-mortem analysis of the oil market in that eventful year. In his introduction, the Opec Secretary-General Abdullah Salim Al Badri said “the year 2015 was a challenging time for the oil industry” and “a period of readjustment for all producers and investors” as they faced the reality of drastically falling prices.

The most important and obvious feature was the persistent decline in prices, which actually started in mid-2014. The Opec Reference Basket (ORB) lost almost half its value, falling from $96.29 (Dh353.38) a barrel (/b) in 2014 to $49.49/b in 2015. That was the lowest average since 2004.

International benchmark crude oils followed suit as Brent fell from $99.51/b to $53.64/b and WTI from $93/b to $48.8/b.

The report attributes this precipitous decline to “persistent oversupply, slowdown in the Chinese economy, lower than expected seasonal winter oil demand and fluctuations in other asset prices, including the US dollar and equity markets.”

Obviously, Opec’s policy of chasing market share since June 2014 is a major factor in oversupply. Compared to 2014, Opec’s crude oil production increased by 1.1 million barrels a day (mbd) to average 31.9-mbd in 2015 as compared to 30.8-mbd in 2014. In addition, there was a 0.15-mbd increase in Opec’s natural gas liquids (NGL) to average 6.15-mbd in 2015. The increase came mostly from Iraq, as its crude oil production increased from about 3.3- in 2014 to 3.9-mbd in 2015.

Deceleration

At the same time, non-Opec production was still increasing though at a much lower rate. The report said that “non-Opec oil supply growth decelerated sharply in 2015 from growth of 2.27-mbd in 2014 to rise by 1.23-mbd” to stand at 57.14-mbd of crude oil and just over 6-mbd of NGLs. The majority of the increase — at 0.91-mbd — still came from US production, though its tight oil production is declining.

This is the most significant decline in non-Opec production for as long as one can remember.

On the demand side, world demand increased by 1.54-mbd in 2015 as compared to 0.96-mbd in 2014. Therefore, oil demand in 2015 stood at 93-mbd. With the exception of Japan and Brazil, the growth was widespread as US, Europe, Asia and the Middle East showed growth, mostly due to increase in transportation and petrochemical requirements driven by lower oil prices.

But oil demand is one thing and consumption another. A lot of the increase in demand actually went into stocks around the world, notably in the OECD region. OECD commercial stocks increased from 2,728 million barrels (mb) at the end of 2014 to 3,015-mb at the end of 2015. This volume is an all-time record and 350-mb above the past five-year average compared to 87-mb in 2014.

OECD’s strategic petroleum reserve (SPR) only increased marginally from 1,580 to 1,587-mb. While the market imbalance was 1-mbd in 2014, it increased to just over 2.1-mbd in 2015. These stocks weigh heavily on prices and sooner or later this will show.

Uneven growth

Oil demand growth was driven mostly by low oil prices as the world economic growth was modest at 2.9 per cent, which is a disappointing situation after the 3.3 per cent in 2014 and below the 30-year average of 3.2 per cent. The growth is also uneven among countries and regions.

While growth in OECD was 2 per cent, Russia and Brazil went into recession. Opec countries’ economic growth fell from 2.9 per cent in 2014 to 2.3 per cent in 2015. This is understandable as the economy is so dependent on oil exports, which fell from $956.2 billion in 2014 to $518 billion in 2015.

Another casualty was investment allocation as many oil related projects were either cancelled or deferred. The report says that world exploration and production spending fell “by around 20 per cent compared with 2014”. The report however claims that “Opec countries continued to stand by their investment plans, in the upstream and in refining and petrochemicals.”

Given the above development of the oil market in 2015, there is a long way before things can improve for producers, especially in Opec. Although the market is moving into balance by the slowdown in Opec production growth and the expected decline in non-Opec supplies in 2016, the average price of the Opec basket of crude oils up to now in 2016 is only $36.63/b.

To maintain the 2015 average of $49.49/b, prices have to average almost $65 a barrel for the rest of 2016 or some $20/b above current prices. This is a very difficult objective to realise.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.