The big story this month is one of tightening supply, with the spotlight firmly fixed on non-OPEC. Oil's price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea, which may result in the loss next year of half a million barrels a day - the biggest decline in 24 years. While oil's recent volatility has been unnerving - Brent crude jolted from a six-year low below $43 /bbl to above $50/bbl in the space of days - the lower price environment is forcing the market to behave as it should by shutting in output and coaxing demand.
US oil production is likely to bear the brunt of an oil price decline that has already wiped half the value off Brent. After expanding by a record 1.7 mb/d in 2014, the latest price rout could stop US growth in its tracks. A sharp decline is already underway, with annual gains shrinking from more than 1 mb/d at the start of 2015 to roughly half that level by July. Rigorous analysis of our data suggests that US light tight oil supply, the engine of US production growth, could sink by nearly 400 kb/d next year as oil's rout extends a slump in drilling and completion rates.
Producers outside of the US also continue to adjust to the lower price outlook. Marginal fields are being shut or are at risk as companies seek to stem losses from high operating costs. Spending curbs are also accelerating decline rates. The sizeable anticipated loss of overall non-OPEC output and robust demand growth suggest that unless prices recover, lower-cost OPEC producers would need to turn up the taps during the second half of 2016 to keep the market in balance. Our forecast shows the 'call' on OPEC for 2H16 leaping to an average 32 mb/d - a level last pumped seven years ago. The group produced 31.6 mb/d during August.
But until then, inventories are continuing to build with global supply - towering 2.4 mb/d above a year ago - outpacing demand. Our balances show the world only starting to siphon off record-high stocks in the second half of 2016. At that point Iran could be producing more oil, provided sanctions are lifted following implementation of the nuclear pact it secured with the P5+1 group.
As for demand, the lure of $50/bbl oil is boosting growth to a five-year high of 1.7 mb/d this year and an above-trend 1.4 mb/d in 2016. US motorists are taking to the roads, propelling domestic gasoline demand to an eight-year high. We expect China, the world's second largest oil consumer, to keep up its crude purchases despite the recent stock market collapse, currency devaluation and steady stream of negative macroeconomic news. Beijing could also buy extra crude to fill up its strategic reserves.
Of course, it is not just non-OPEC that is taking a hit from lower oil prices. High-cost projects are also at risk in OPEC nations. The 12-member group meanwhile continues to pump vigorously, with Saudi Arabia, Iraq and the UAE producing at or near record rates. On the face of it, the Saudi-led OPEC strategy to defend market share regardless of price appears to be having the intended effect of driving out costly, "inefficient" production.