The MENA region is back in the limelight and once again it is due to OPEC production. Just as OPEC meets informally in Algeria in yet another attempt to hammer out a production agreement, Libya is rearing its head back up again after forces loyal to Khalifa Haftar, a military strongman from eastern Libya, seized of control of several terminals in eastern Libya in early September. Libya’s NOC then swiftly lifted force majeure at several of these terminals that have been shuttered since 2014. Production has risen by 0.1 mb/d since these developments as some of the fields that were shut in due to the closure of the terminals are restarting. But, as we discuss in our second In Focus on the prospects of Libya’s production recovery, much like two previous anticipated restarts, this is hardly a slam dunk. Not only has the country’s oil infrastructure been battered due to the civil war and battle against self-titled Islamic State, NOC’s swift collaboration with Haftar will hardly help it secure much needed funds from the Tripoli government, unless a political compromise is reached with Haftar.
Still, in the short term, the market will have to contend with 3-4 mb of Libyan crude in storage and a small increase in production, at a time when some disrupted Nigerian supplies also returning and OPEC is struggling to find common ground to reduce production. In a change from recent dynamics, key OPEC members, namely Saudi Arabia, are willing and eager to cut output (aiming beyond merely freezing output at current levels, in order to speed up the global rebalancing, although Nigeria and Libya will be exempt due to ongoing disruptions), but this is on the condition that Iran freezes output at around 3.6 mb/d, which Iran has yet to accept.
Clearly, as prices have struggled to reach $60 or higher, the urgency to put extra barrels in the market to make up for the price shortfall and keep revenues flowing has taken precedence for the region. OPEC output is at a record high, despite growing outages in various member countries, as Middle Eastern OPEC countries have raised crude output to record levels, and at times, have also pushed refinery runs to new all-time highs, resulting in record product exports as well. Meanwhile the impact of falling revenues is becoming increasingly visible in the broader economy, with Middle Eastern demand running lower y/y in the year-to-July for the first time since 1980. We detail these trends in our regular sections on Demand, Refining and Supplies.
But also contributing to the weakness in demand, is the switch away from liquids fuel towards natural gas in some countries, such as Saudi Arabia and Iran, as the Middle East is the last major hold-out for liquid-fired power generation. In our first In Focus, where we delve into the growing demand for natural gas in the MENA region and the associated displacement of liquids fuel, we conclude that with electricity demand growth easing, power sector liquids consumption could fall by 0.2-0.3 mb/d by 2017. But with the rapidly expanding petrochemicals sector also competing for natural gas and the supply prospects in most of the region not particularly rosy, we expect liquids burn, particularly fuel oil, to expand again from 2018 onwards. And as regional gas demand growth continues to outpace supply growth, the Middle East is increasingly turning to LNG imports. Our forecasts show imports reaching 16.8 Mt this year, and 22.8 Mt by 2018.
Overall, neither the political nor the economic outlook of the region look particularly promising, and the longer oil prices stay low, the more likely the current equilibrium becomes untenable.