Non-OPEC crude and other liquid supply scaled new heights lately, but you would not know it from world oil prices. Total crude and other liquids supply from non-OPEC countries, including biofuel and processing gains, surged by 1.7 mb/d in 3Q13 y-o-y, the steepest annual growth for any quarter in over 10 years. Throw in OPEC NGL and the figure tops 1.85 mb/d. Amid exceptional outages in Libya and Iraq, this gusher didn’t do much to douse oil markets, though. A crude futures rally during the same quarter took Brent prices to highs of around $117/bbl at the peak. Prices have since receded but remain elevated.

Non-OPEC growth may take something of a breather for the remainder of the year, but the summer’s surge looks less like a one-off than a preview. If anything, the non-OPEC supply outlook has brightened in recent months, with Sudan and South Sudan coming to terms and the chronically delayed super-giant Kashagan field finally coming on line. Non-OPEC supply growth is now projected at an average 1.7 mb/d for 2014, peaking at 1.9 mb/d in the second quarter. This would be the highest annual growth since the 1970s. The US’s place in the driver’s seat of growth is also a throwback to decades past. With output of more than 10 mb/d for the last two quarters, its highest in decades, the nation is set to become the largest non-OPEC liquids producer by 2Q14, overtaking Russia. And that’s not even counting biofuels and refinery gains.

Non-OPEC growth, however, needs to be seen in perspective. The IEA has often noted that the market impact of supply disruptions depended on the context in which they occurred, as much as on the outages themselves. The same is true of supply additions. Non-OPEC supply growth in 3Q13 was partly offset by a 1 mb/d plunge in OPEC crude, driven by a collapse in Libyan supply and Iraqi rehabilitation and maintenance work at key southern export terminals. Although Tripoli has since announced a partial restart of production, tribal unrest and political instability continue to throw formidable hurdles for the return of Libyan oil to market. With OPEC losses partly cancelling out North American gains, crude prices have remained well supported by geopolitical turmoil in the MENA region. It also helps that non-OECD demand for storage has surged, effectively preventing any seasonal build in aggregate OECD stocks ahead of winter.

Mutually offsetting supply developments do not amount to a zero-sum game. The replacement of OPEC barrels with non-OPEC oil is sending all kinds of ripples through the market. Benchmark Brent and WTI prices, after converging, are once again moving apart, with coastal US grades like Light Louisiana Sweet at a deepening discount to Brent. Importers of Libyan oil have come under pressure. Yet another European refinery closure was announced this month, the 16th since the financial crisis, even as ‘advantaged’ US refiners have kept throughputs at near-record highs. Further changes to the global refining scene are ongoing, with the commissioning of new capacity in the Middle East and Asia. What seems certain is that surging non-OPEC production does not necessarily equate to a supply glut. Against the backdrop of recent developments in the Middle East and North Africa, the link between oil prices and non-OPEC supply growth is undergoing a new twist.
Source: IEA