OPEC+ is facing a steep challenge as it prepares to gather in Vienna next month.
Global oil supply could continue to rise at a rapid pace in 2020, surpassing the increase in demand. According to new figures from the International Energy Agency (IEA), non-OPEC supply could expand by a staggering 2.3 million barrels per day (mb/d), nearly double the expected increase in demand at 1.2 mb/d.
That forecast doesn’t just depend on substantial growth from U.S. shale (although it does), but also on expected increases from Brazil, Norway and Guyana.
The surge in output complicates OPEC+’s task as Vienna approaches. The production cuts are currently set to expire at the end of March 2020, but the group is widely expected to extend that agreement through the end of the year.
“The hefty supply cushion that is likely to build up during the first half of next year will offer cold comfort to OPEC+ ministers gathering in Vienna at the start of next month,” the IEA said. “However, a continuously well-supplied market will lend support to a fragile global economy.”
The supply overhang creates problems for OPEC+. “The OPEC+ countries face a major challenge in 2020 as demand for their crude is expected to fall sharply,” the IEA said. “During the first half of 2020, the call on OPEC crude falls to 28.2 mb/d versus 30.2 mb/d in 4Q19.” In other words, the expected surge in supply from the U.S., Guyana, Brazil and Norway could force OPEC+ to back out more production.
“This highlights the need for another cut in output,” Commerzbank said in a note. Related: Real Estate Tycoon Buys Up Oil Assets At Rock Bottom Prices
But the forecast has some issues with it. The IEA acknowledges the headwinds facing U.S. shale drillers. “Capital discipline and investor apathy is restricting investment,” the agency said. Oilfield services companies are warning about a slowdown. Individual shale companies are also admitting that they will rein in growth prospects. At the same time, the oil majors are aggressively expanding drilling.
All told, the IEA still sees U.S. supply growing at 1.2 mb/d in 2020, a figure that is unchanged from last month’s report, despite the wave of third quarter earnings reports that offered some evidence of a slowdown.
It is worth noting that the IEA is arguably at the optimistic end of a lot of U.S. shale forecasts these days. For instance, Goldman Sachs lowered its supply forecast for 2020 from U.S. shale to just 600,000 bpd.
IHS Markit goes further, predicting a more dramatic slowdown. The firm sees U.S. supply growth of just 440,000 bpd in 2020, a rather stark divergence from the IEA figures. U.S. shale is “slowing down fast,” IHS Markit said in a report earlier this month. In 2021, it sees shale “flattening out.”
“Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” Raoul LeBlanc, vice president for North American uncoventionals, IHS Markit, said in a statement. “This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.”
On the demand side of the equation, the IEA trimmed its forecast slightly to 0.985 mb/d, down from 1 mb/d previously. The agency sees that figure rebounding to 1.2 mb/d next year. Related: U.S. Natural Gas Production Has Hit An All Time High
“Recent data point to a significant slowdown in world industrial production growth since the end of 2018. The IMF attributes this slowdown to a sharp drop in car production and sales, weak business confidence and slowing Chinese demand,” the IEA said.
Needless to say, the outcome of the U.S.-China trade war has a great deal of influence on demand. The IEA said that oil demand would be 400,000 bpd higher in 2020 if tariffs were removed. But the general assumption is that most of the tariffs will remain, notwithstanding the pending “partial deal” that could suspend or delay some levies.
Turning back to Vienna, OPEC+ faces a tough choice as it prepares to meet. If the IEA is correct and global supply growth is expected to surge next year, the group risks a price crash if it doesn’t cut deeper. However, the ministers can probably take comfort in the fact that U.S. shale is slowing down dramatically and a growing number of analysts think the IEA is overestimating shale’s resilience.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
The current glut in the global oil market comes mainly from the ongoing trade war between the United States and China. The war has widened the glut in the market from a relatively manageable level of 1.0-1.5 mbd before the war to an estimated 4.0-5.0 mbd currently.
Claims of a continued rise in global oil supplies in 2020 from the United States, Brazil, Norway and Guyana are no more than hot air.
The claim by the US Energy Information Administration (EIA) and the IEA that US oil output is currently 12.5 mbd is a plain lie. How could this be right when Baker Hughes reported a decline of 203 oil rigs this year alone with Texas the home of the Permian which accounts for 60%-70% of total US shale oil production having the fastest rig drop. In addition to that, the Post Carbon Institute said three days ago that projections of explosive and long-term potential for US shale may rest on some faulty and overly-optimistic assumptions. This is the latest of a myriad of authoritative reports on a steep slowdown in US shale oil production.
Baker Hughes rig count is a pivotal indicator of US shale oil production. Rig counts don’t lie. They tell the truth as it is on the ground. Current US oil production couldn’t be higher than 10 mbd rather than the highly inflated figure of 12.5 mbd. EIA's hype aside, US production in 2020 could in no way exceed 10 mbd.
Brazil couldn’t raise its current production much beyond 2.60 mbd. Norway’s production is continuing its decline whilst Guyana is yet to convert its recent oil discoveries into production. This will take a few years from now.
OPEC+ may decide to extend the current production cuts through the end of the 2020 but will not deepen the cuts since such a move will lead to a loss of market share with no positive impact on oil prices. Moreover, Russia will not accept deeper cuts.
Still if oil prices continue next year at the current range of $61-$63 a barrel, it will be US shale oil production which will pay the price.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London