(EnergyAsia, August 31 2015, Monday) — After years of strong growth, US oil and liquids production will decline in 2016 to weaken the world’s supply increase, said the US Energy Information Administration (EIA) in its August monthly report.

The forecast for the production decline is significant as it finally halts the runaway US oil industry that have enabled the world to reduce dependence on OPEC’s supply from out the volatile Middle East, Africa and Latin America. The EIA expects the US to produce nine million b/d in 2016, down from the projected record 9.4 million b/d of crude oil and condensate this year. US output of 8.7 million b/d in 2014 contributed to the dramatic collapse in global energy prices over the past 15 months.

With oil prices remaining weak in the near term, US companies are forced to shut-in rigs, said the EIA. US WTI crude briefly plunged to a six-and-half-year low of US$37.75 a barrel in late August while Brent crashed to US$42.23.

On the demand outlook, the EIA has boosted its forecast for global growth to 1.56% for 2016, up from 1.5% in its previous report in July. It now expects the world to consume 93.62 million b/d in 2015 and 95.08 million b/d next year, compared with the previous call for 93.63 million b/d and 95.03 million b/d.

Despite the contrasting supply-demand direction, the weight of futures and options bets against oil’s recovery has led the EIA to sharply slash its latest forecast for prices by US$6 to US$8 a barrel. The agency now expects Brent crude to average US$54 a barrel in 2015 and US$59 next year, down from US$60 and US$67 in its July report.

The added bearish outlook is due largely to the expected return of Iranian oil supply following progress in Tehran’s talks with six world powers over its controversial nuclear energy programme.

“This forecast assumes sanctions relief occurs in 2016, contributing to an annual average increase in Iranian crude oil production of 300,000 b/d from 2015 to 2016, with most of the increase coming in the second half of 2016,” said the EIA.

The world’s growing oil stockpiles are also piling the pressure on near-term prices and boosting the market’s contango bias.

“Since global liquids inventories began to consistently grow in the third quarter of last year, the difference between futures prices and near-term contracts has increased from nearly zero to US$5 to US$10 per barrel over the past year,” said the EIA. This market behaviour reflects the increased costs associated with storage needs and the expectation of reduced oil supply growth in the coming months.

Oil prices received a lift in late August on news that Saudi Arabia had stepped up its military campaign against Iran-backed forces in neighbouring dis-integrating Yemen.

While Yemen’s 130,000 b/d production hardly matters in a glutted market, its position at the strategic Bab el-Mandab Strait could threaten international shipping traffic amid the worsening proxy Saudi-Iran conflict.

According to the EIA, at least 3.8 million b/d of oil is shipped through Bab el-Mandeb, making it a tempting military target.