China's Oil Production Remains Weak - Oil Markets Daily

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Summary

China's production is struggling.

We estimate China's oil production to decline to 3.7 million b/d by year-end.

Production outside of the big three will continue to decline at current oil prices.

Shocking news for oil bears is the realization that oil producers other than the U.S., Russia and OPEC exist. The other ~45% of world oil production that's almost entirely neglected by the analyst community continues to weaken. China's National Bureau of Statistics data showed that China's crude output dropped to 3.89 million b/d, close to the lowest it's been in the last six years.

The year-over-year decline is 9.8%. The month-over-month production, however, was up from 3.87 million b/d in August. We said in this article that China's crude output should continue to weaken into year-end, but stabilize around 3.7 million b/d as China opens new reserves to fight off the natural declines. The big decrease year over year comes from shutting down aging wells and slowing production in high-cost areas.

What's more notable to us, however, is that China's demand for oil remains healthy, with crude processed in September averaging 10.658 million b/d - up 2.4% from last year. Another notable statistic we follow is car sales, and that continues to be very strong, jumping 29% in September.

Oil bears have pointed to a potential slowdown in demand and macro concerns that have not materialized, and we suspect they won't within the next 18-24 months. Global crude demand remains solid, growing at a steady 1.2 million b/d, but our internal data has an implied demand of 1.4 million b/d. Remember that a decrease in storage is also a function of demand, and with the recent decline in global storage, we see demand currently higher than what the IEA has projected.

Looking ahead, oil production from countries outside the big three (U.S., Russia, and OPEC) will remain challenged. Breakeven forecasts for many of the non-OPEC producers range between $65 and $80, and unless oil prices get there soon, we should expect overall production to decline. China's production will likely decline to 3.7 million b/d by year-end and then stabilize.

HFI Research continues to believe that the current consensus is overly bearish on oil prices. The idea of the "shale price band" ignores oil production from the other half of the world, and we highlighted this in detail in our Big Picture Outlook piece. If you are interested in reading exclusive energy research content, please consider signing up here. Thank you for reading our Oil Markets Daily.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.