30 July 2016
Doha - The collapse in the capital expenditure has started to take the toll on global conventional energy output. The effects of these spending cuts are expected to be long-lasting.

Bank of America Merrill Lynch (BofAML) weekly update on 'Global Energy' noted capex in the global oil and gas industry has tumbled in the past 18 months, with total spending falling from $690bn in 2014 to just $410bn this year. Every region of the world has curtailed spending, but North America has certainly led the way with the total rig count in the US falling from 1931 in September 2014 to 447 this past week.

BofAML's latest figures point to a 41 percent or $285bn global oil and gas capex reduction from the 2014 peak. This collapse in capex is starting to impact output and BofAML estimate that non-Opec oil field decline rates have accelerated to 5 percent. This figure is higher than the 4.87 percent recorded in 2009, and it is also slightly higher than our previous estimates for this year of 4.9 percent. On a country by country breakdown, larger than previous years' decline rates have been recorded in countries like Australia, Netherlands, Canada and even Russia. Regionally, decline rates are accelerating particularly in the Middle East and OECD Pacific, but are holding up better in Asia.

GCC, Iran, and Iraq will likely see higher output and could strive to fill the oil supply gap. Saudi Arabia and the rest of GCC, coupled with Iraq and Iran will attempt to keep gaining market share. In fact, much of the growth in global oil supplies in the past year has already come from GCC, Iraq and Iran and BofAML projects growth of 1.2 and 0.5 million b/d from these three players this year and next, respectively.

"Even then, it will be hard to fill the widening supply gap on current investment trends. For instance, the Iraqi rig count has dropped in half over the course of the last 24 months while Saudi Arabia has not really increased drilling activity to make up for the staggering 37 percent drop in global rigs since the 2014 peaks. The rig count in Abu Dhabi and Kuwait has increased, and that is a relevant shift." BofAML reiterated its estimates that global oil supplies will likely expand by just 0.2m b/d YoY in 2017 against demand growth of 1.1m b/d, and retain its view that Brent will average $61/bbl next year.

BoAML forecast 2016 Brent and WTI prices to average $46/bbl and $45/bbl, respectively. Peak oil demand lies beyond 2050 if oil stays below $100, as transport offset efficiency and substitution.

According to BofAML report, spot LNG prices have decoupled from Brent and may push lower on rising LNG oversupply even as oil prices continue to recover. Asian buyers have bought too much LNG on long-term contracts and will be selling in the face of the largest supply wave ever. EU and Asian spot LNG prices may eventually find support on coal-togas switching levels, which at present sit at $3.80/MMBtu.

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