The oil market saw a rather significant surplus in the first half of 2019, much larger than previously expected. Looking forward, supplies are set to tighten in the second half of the year, but that may only be a hiatus before the glut returns.
Global oil supply exceeded demand by about 0.9 million barrels per day (mb/d) in the first six months of this year, according to the International Energy Agency's latest Oil Market Report. This retrospective look upends the prevailing sentiment that occurred just a few weeks ago. For instance, the IEA said that the oil market saw a surplus of about 0.5 mb/d in the second quarter, while the agency previously thought there was going to be a 0.5 mb/d deficit.
"This surplus adds to the huge stock builds seen in the second half of 2018 when oil production surged just as demand growth started to falter," the IEA said. "Clearly, market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future."
The extension of the OPEC+ cuts through the first quarter of 2020 removes a major uncertainty, but the IEA said it "does not change the fundamental outlook of an oversupplied market."
The conclusions echo those of OPEC itself, which said in its own report published a day earlier that the "call on OPEC" will be significantly lower next year. Rising U.S. shale production will exceed additional demand both this year and next, which means that the market could see a significant surplus in 2020. In other words, OPEC+ faces a conundrum: Keep its current production cut deal intact and face a worsening glut, or cut further. Related: Oil Prices Rise Amid Further Rig Count Decline
"On our balances, assuming constant OPEC output at the current level of around 30 mb/d, by the end of 1Q20 stocks could increase by a net 136 mb. The call on OPEC crude in early 2020 could fall to only 28 mb/d," the IEA said. OPEC produced 29.83 mb/d in June.
OPEC put demand for its oil at a higher 29.3 mb/d next year, which, to be sure, is a rather significant discrepancy from the IEA figure. However, the conclusion is the same - OPEC may be forced to slash production further if it wants to head off a price slide. OPEC's figures imply that it may need to cut output by 560,000 bpd; the IEA implies a deeper 1.8 mb/d reduction might be needed.
The IEA was diplomatic, saying that the threat of a renewed surplus "presents a major challenge to those who have taken on the task of market management." Notably the IEA did not downgrade its demand forecast, sticking with growth of 1.2 mb/d for this year. Days earlier, the U.S. EIA downgraded its demand estimate to 1.1 mb/d. The Paris-based IEA was more optimistic about a rebound in economic growth, even as it downgraded its second quarter demand growth figure by a whopping 450,000 bpd to just 800,000 bpd year-on-year.
All three of the major forecasters - OPEC, IEA and EIA - see robust supply growth from U.S. shale. The specific figures vary, but they generally see non-OPEC production (with U.S. shale accounting for most of the total) growing by around 2 mb/d this year, and by even more next year. In other words, non-OPEC supply growth for both 2019 and 2020 exceed demand. Related: Oil & Gas Discoveries Rise In High-Risk Oil Frontiers
The one bit of uncertainty in those forecasts is the unfolding slowdown in the U.S. shale industry. As Bloomberg reported, "pipeline limits, reduced flow from wells drilled too close together, low natural gas prices and high land costs" are putting a squeeze on Texas shale drillers. Financial results are bad, and have been rather grim for quite some time. Despite huge increases in production (or, because of such extraordinary growth) North American oil companies have burned through $187 billion in cash since 2012.
The big question is whether or not the blistering rate of growth begins to slow as investors sour on the industry. Right now, there is only patchy evidence of this, with the rig count down and the pace of growth seemingly on the wane. Bloomberg cited more than a half dozen shale drillers that have dramatically scaled back their production growth forecasts as they slow the pace of drilling. It remains to be seen if, in the aggregate, U.S. output begins to flatten out.
If that occurs, it would be a massive relief to OPEC, which would find its task of rebalancing a bit easier. Otherwise, by 2020, the cartel may be forced to cut production by even more than it already has.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
The second observation is that despite the glut, the fundamentals of the global economy are still robust. Their bullish influence would have been felt much stronger if not for the trade war casting dark clouds over the global economy creating uncertainty and depressing the global demand for oil and therefore oil prices. This very important factor enhances an already existing glut and to some extent undermines OPEC+ production cut agreement.
The third observation is that the claim of a robust supply growth from US shale oil is plain hype. Authoritative reports have never stopped coming about a major slowdown in US shale oil production. If the Permian which accounts for 65%-70% of all US shale oil production is slowing down, how could the US Energy Information Administration (EIA), Rystad Energy and the IEA claim that US shale oil production is booming. Therefore, the claim by the EIA that US oil production is currently 12.1 mbd ignores the fact that the figure of 12.1 mbd includes an estimated 2.1 mbd of natural gas liquids (NGLs) which major oil exchanges neither accept as crude oil nor are they sold as such. US oil production is projected to decline to 10-11 mbd in 2019 and 10 mbd or even less in 2020. US production growth is set to decelerate sharply from 2020 onwards.
The fourth observation is that an end of the trade war could accelerate global economic growth thus enhancing global oil demand, eliminating the glut in the market and sending oil prices surging to $70s if not even $80 a barrel this year.
The fifth observation is that President Trump wants to end the trade war having realized that he can never win a trade war against it. The fact that the Pentagon is trying to break
China’s grip on the production and exports of the rare earth minerals shows how worried the US over China’s threat to impose an embargo on the supply of rare earth minerals if President Trump continues to escalate the trade war and tries to push China into a corner. That could potentially cripple large swathes of US industry from smartphones, turbines, lasers, missiles, advanced weapon sensors, stealth technology and jamming technology to name but a few. By the time the United States has found alternative supplies, the damage would have been done.
China has shown its mettle during the trade war when President Trump blinked first by easing restrictions on Huawei, the Chinese tech giant, in a bid to get trade talks moving again.
Washington had earlier announced a ban that restrict Huawei’s ability to do business with US firms due to national security concerns.
And while China could emerge the less hurt from a continuation of the trade war, there could be no winners. Both titans will be losers with the global economy the biggest loser by far.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
"Located in the Wolfcamp Shale and overlying Bone Spring Formation, the unproven, technically recoverable reserves are officially the largest on the planet. But curiously this story isn't making waves in the mainstream media."
The one thing we can count on is U.S. Shale, on a long-term basis, always outperforms expectations, and there are more discoveries to be made in the U.S. and elsewhere to permanently suppress the price of oil.
By the way, how can OPEC by considered a "Cartel," if it produces less than 50% of the world's oil? The days of the 1973 Oil Embargo are long gone.
OPEC is dead.
No energy system can produce sum useful energy in excess of the total energy put into constructing it.
This universal law is applicable to all energy systems - the sun, nuclear fission and fusion, wind, solar, hydro and you name it.
Humans have never managed and will never manage to extract, collect and utilise one unit of excess Energy expanding less than one unit of Energy – all along.
All forms of power production humans have today are gold-grade fossil fuels derivatives.
This includes shale oil and gas.
Energy, like time, only flows from past to future” (The Fifth Law).
Doyle Johnson,
Texas Oil Investor