Oil: Non-OPEC Production Declines

Oil markets will continue to be buffeted by Russian overtures to OPEC suggesting a desire to orchestrate a production cut. Uncertainty over the Fed’s next move will keep markets on edge. Markets are rebalancing, nonetheless, and prices are bottoming.


Even though Russian oil production remains at post-Soviet highs, it has been declining slightly month-on-month since mid-2015, and started posting yoy declines in the fourth quarter.

In addition to Russia, other non-OPEC producers will see meaningful production losses this year. Noteworthy among this group are North Sea producers. Oil output in the North Sea took a turn lower in 2015Q4. We expect low prices will force production lower this year and next, in line with the EIA’s forecast of 2.75 mm b/d this year, or about 250 kb/d yoy.

Overall our commodity strategists expect non-OPEC oil (crude and condensates) production to fall yoy by close to 1.7 mm b/d in 2016. This is higher than the EIA’s estimated 640 kb/d production decline for non-OPEC. In our projection, we see sharply lower U.S. production – please see the next Insight, (Part II) Oil: Sharply Lower U.S. Output Expected.

The U.S. Dollar Shortage

U.S. dollar liquidity, calculated as the U.S. monetary base plus the amount of U.S. government securities held in custody for foreign accounts, is shrinking.


Curiously, this U.S. dollar liquidity measure is presently contracting faster than it did during the Asian/EM crises in 1997-’98.

Both components of this measure are weak. The U.S. monetary base is shrinking as U.S.-domiciled banks’ reserve balances at the Federal Reserve are contracting. Meanwhile, foreign holders of Treasurys are selling their U.S. bonds and notes as demand for the greenback is surging. This is likely related to EM central banks’ intervention in their exchange rate markets to defend their currencies.

Historically, this measure of U.S. dollar liquidity has been correlated with EM share prices, and somewhat less so with advanced countries’ share prices. Our EM team believes shrinking U.S. dollar liquidity will be accompanied by a rising demand for U.S. dollars, especially from developing countries. This will ensure the U.S. dollar’s value is bid up further, particularly versus EM currencies.

Please see the next Insight, (Part II) The U.S. Dollar Shortage.