Unintentionally Helping OPEC is China’s Oil Collapse

Unlikely support from its biggest customer is forthcoming for OPEC’s campaign to prop up oil prices.

According to analysts at CLSA Ltd., Sanford C. Bernstein & Co. and Nomura Holdings Inc, China’s production is forecast to fall by as much as 7 percent this year, extending a record decline in 2016. And late last year, Organization of Petroleum Exporting Countries reached a deal to trim supply to support prices and the Chinese reduction is about the same size as the output cut agreed by Iraq, the second-biggest producer in the  oil cartel.

“China’s domestic crude output decline will certainly help OPEC’s plan to reduce global supply,” said Nelson Wang, a Hong Kong-based oil and gas analyst at CLSA, who sees a 7 percent slide this year. ”Even if that isn’t China’s intention, it’s just the reality that China can’t produce more under the current circumstances.”

With fields stretching from offshore its southern coast to the far north east, While China consumes more oil than almost any other country, it’s also one of the world’s biggest producers. The nation’s output suffered a record decline last year and the collapse in prices that began in 2014 is taking its toll. And hence China will be forced to depend more heavily on imports as OPEC seeks to prop up the global oil market.

More than 50 percent below levels in 2014, the year OPEC decided to tackle a global glut by keeping the taps open, Brent crude, benchmark for half of the world’s oil, averaged about $45 a barrel last year.

After the crash, Chinese state-owned firms shut wells at mature fields that had become too costly and consequently its output slumped in 2016. Noting the first decline since 2009 and the biggest in data going back to 1990, crude production fell 6.9 percent in the first 11 months of 2016 to about 4 million barrels a day.

The International Energy Agency estimates that output will slide a further 240,000 barrels a day this year and notes that output fell 335,000 barrels a day last year as the country’s biggest producers cut spending. The Paris-based group said last month that “with no uptick in activity expected from the major companies,” production shrank to a seven-year low in October.

According to data from China National Petroleum Corp, there was a sip output of about 3 percent last year and reached 732,200 barrels a day from the Daqing field, one of China’s biggest and oldest.

According to a 21st Century Business Herald report, National Energy Administration (NEA) director Nur Bekri said at the agency’s annual meeting in December that  the country’s energy regulator, forecasts that output this year will remain stable at about 4 million barrels a day.

According to Virendra Chauhan, an analyst at London-based Energy Aspects Ltd, lower domestic production will help support the nation’s imports, especially in the first half of the year.

according to Wood Mackenzie Ltd., as exploration since 1990 has yielded mostly natural gas and capital spending was cut because of the slump in oil prices, Asia-Pacific’s crude output will drop by about 1 million barrels a day to 6.5 million by 2020. The consultant says that China will account for 47 percent that decline.

“China’s largest oil fields are aging rapidly,” said Gordon Kwan, Nomura’s Hong Kong-based head of Asia-Pacific oil and gas research, who sees the country’s output falling 5 percent even as prices rise. “Advanced technology can only mitigate the decline rate, but can’t reverse the structural trend.”

(Adapted from Bloomberg)

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Categories: Economy & Finance

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