[LONDON] Oil supplies outside Opec are holding up surprisingly well against collapsing prices, signaling crude has further to fall before global markets rebalance, according to Citigroup Inc.
Production from Brazil, Russia, Canada and the North Sea has increased this year even after Brent crude futures slid to a six-year low in January, according to the bank. That's frustrating Saudi Arabia's strategy to tackle a global glut by pressuring supplies outside the Organization of Petroleum Exporting Countries, Citigroup said. Additional output from Iran and Mexico may add to the surplus.
Brent returned to a bear market on Monday as an overhang in the US expands, key Opec members push output to record levels and a plunge in China's equities stoke concern about the country's demand prospects. Iran reached a deal over its nuclear program with world powers on July 14 that may remove sanctions on its crude exports.
"By what metric are the Saudis winning?" Seth Kleinman, London-based head of energy strategy, said in a telephone interview on Tuesday.
"Non-Opec supply is doing fine, prices are low and heading lower, and now Iran is coming back to the market."
While Saudi Arabia steered Opec last November to defend its market share by squeezing high-cost producers elsewhere, non- Opec supplies have proven resilient, Mr Kleinman said. Brazilian output rose 9.4 per cent in the first half from last year, while Canada's expanded by 2.4 per cent and Russia's by 1.1 per cent, according to the bank.
"Oil looks set for new lows," Mr Kleinman said in a report on July 27.
Investment cutbacks in oil and gas projects around the world, estimated at about US$200 billion by consultant Wood Mackenzie Ltd, may help the Saudi plan to take effect over time, Mr Kleinman said. Still, additional output from Iran could fill the gap, according to Citigroup.
"You can say that the canceled projects are a signal that the Saudi plan will come to fruition," Mr Kleinman said. "But Iran could derail that entirely. Iran has the capacity to really ramp up exactly into the period when the market would have been tightening due to these project cancellations."