There is a general consensus amongst industry analysts that the oil oversupply creating the current market downturn will narrow by the end of 2016, Douglas-Westwood, an energy intelligence group, said in its DW Monday report. However, DW said, it is highly likely that the oversupply will increase once again in 2017.

The group said that its data support this view, with DW’s World Drilling & Production Market Forecast showing the first oil production decline in 2016 since 2009 – when OPEC strategically cut output in order to support prices.

According to DW, this is largely due to considerable reductions in oil production from the US shale plays as well as widespread outages in Nigeria as a result of militant attacks in the Niger Delta. Therefore, the oversupply will be eroded from the supply side with the demand side stuttering as a result of slowing Chinese economic growth and uncertainty surrounding the future of European markets, the group explained.

However, DW said that its 2017 view is less positive for the oversupply. The implementation of a host of offshore developments sanctioned before the oil price crash will lead to a 1.8 million barrels per day (mmbbl/d) increase in offshore oil output and a 2.1 mmbbl/d increase overall.

Such projects include the ill-fated Kashagan project in the Kazakh Caspian. Kashagan alone is expected to contribute nearly 300 thousand barrels per day (kbbl/d) in 2017. Significant additions are also expected from the Middle East in the form of condensate output from the 24-phase South Pars development and around 300 kbbl/d Khafji field – previously shut-in due to environmental infringements and disagreements between joint operators Kuwait and Saudi Arabia.

DW noticed that this pattern is expected to be seen globally, even mature plays in the North Sea and south-east Asia seeing increased output in 2017 as a result of the lag effect of offshore developments (the time between project sanctioning and first oil can be many years).

Demand outlooks from BP, EIA and IEA suggest 2017 demand growth around 1.2 mmbbl/d to 1.5 mmbbl/d, therefore it is highly likely, the DW said, that the oversupply will increase once again next year.

Whilst this is not certain to push oil prices down once more, it is likely to dampen the recovery until later this decade when a lack of project sanctioning in the last two years leads to a significant drop in offshore oil output additions towards to the end of the decade.

DW said that this will cause offshore oil production to peak at 29.1 mmbbl/d in 2019 before declining slowly into the 2020s.

Onshore oil production is unlikely to sufficiently offset this trend to keep pace with demand growth later this decade, therefore, DW concluded, this may be the point the market reaches equilibrium.