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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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IEA Predicts Nightmare Scenario For OPEC

OPEC

The U.S. will supply much of the world’s additional oil for the next few years, according to a new report from the International Energy Agency (IEA).

Over the next three years, the U.S. will cover 80 percent of the world’s demand growth, the IEA says in its newly-released Oil 2018 annual report. Canada, Brazil and Norway will cover the remainder, leaving no room for more OPEC supply.

The irony is that the substantial gains in output from shale will only be possible because of the OPEC cuts, which has tightened the market and boosted prices. This fact is not lost on OPEC producers. "If you are a shale oil producer, who brought you back? It was OPEC," the UAE’s oil minister Suhail Al Mazrouei, said at a recent industry conference, according to Bloomberg. "Without OPEC there’d be chaos in the market."

Indeed, the IEA’s new report paints a pretty gloomy picture for OPEC members, who are hoping to phase out their supply cuts after this year. With non-OPEC supply rising quickly, particularly in the U.S., OPEC may struggle to figure out a way to increase output without pushing down prices, according to the IEA’s analysis.

That could put pressure on the cartel to keep the production cuts in place for longer than they had wanted, although it seems hard to imagine they maintain the production ceilings for another three or four years. Doing so would mean handicapping themselves and ceding even more market share to U.S. shale and other non-OPEC producers. Still, it is unclear how this plays out – returning to full production, even if phased in gradually, presents its own problems, if the IEA’s forecast is accurate. Related: China Is Single-Handedly Solving The Gas Glut

The IEA sees demand for OPEC oil actually declining in absolute terms over the next few years as it is edged out of the market by non-OPEC supply. OPEC production only grows by 750,000 bpd through 2023 under the energy agency’s forecast, although that also takes into account a 700,000-bpd decline in Venezuela.

The bottom line is that the IEA sees oil demand rising by 6.9 million barrels per day (mb/d) by 2023, with more than half of those increases coming from China and India. Meanwhile, supply grows by about 6.4 mb/d, with a whopping 3.7 mb/d coming from the U.S., nearly 60 percent of the total global supply increase.

By sector, petrochemicals starts to take on a larger role in driving oil demand, especially as the transportation sector starts to see a greater adoption of electric vehicles. But it isn’t just EVs – abundant oil and cheap natural gas are fueling a surge in petrochemical investments.

Nevertheless, while the IEA sees an explosion of shale output for the next five years or so, beyond that the story is different. The massive cuts to upstream investment since the collapse of oil prices in 2014 will begin to cause supply problems at the beginning of the next decade. Spending levels are only now starting to pick up, but are still at a fraction of pre-2014 levels, which means that there will be a dearth of new, large-scale conventional oil projects in several years’ time. “This is potentially storing up trouble for the future,” the IEA wrote in its report.

Moreover, natural depletion from existing fields essentially wipes out 3 mb/d of supply every year. That, combined with demand growth, means that the oil industry needs to replace “one North Sea each year,” the IEA says. But the industry is no longer spending enough to cover that gap. In 2017, new oil discoveries fell to another record low, with less than 4 billion barrels of oil equivalent found. The lack of new oil in the works is sowing the seeds of supply problems in the 2020s.

Related: Can Russia & China Rescue Venezuela?

“The United States is set to put its stamp on global oil markets for the next five years,” Fatih Birol, the IEA’s Executive Director, said in a statement. “But as we’ve highlighted repeatedly, the weak global investment picture remains a source of concern. More investments will be needed to make up for declining oil fields – the world needs to replace 3 mb/d of declines each year, the equivalent of the North Sea – while also meeting robust demand growth.”

The IEA report will provide a fascinating backdrop to the start of the annual CERAWeek conference in Houston, where industry titans and oil ministers will gather this week. No doubt the aggressive forecast for U.S. shale will provide a lot of fodder for conversation for both shale boosters and anxious OPEC representatives.

By Nick Cunningham of Oilprice.com

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  • Mark Battey on March 05 2018 said:
    If you attempt to price fix in commodities, you had better be sure you really are the dominant force in the market or what is happening to the Saudis and Russia will happen to you.
  • Frank on March 05 2018 said:
    I find it hard to believe we're gonna get to 2020, with peak demand clearly in sight, and see a lack of supply. Will every petro-dependant nation in the world not be pumping like mad to cash in those last few billion barrels?
  • Kr55 on March 05 2018 said:
    IEA seems to just be trolls at this point, trying to counter OPEC reports. OPEC probably knows more about shale than the IEA does. Saudi's have bought up plenty of technology and assets at bargain prices.

    Like Novak said to reporters, it's insulting at this point that people assume OPEC and Russia don't understand shale.
  • Brian Bresee on March 05 2018 said:
    OPEC is swimming against strong market forces, not something they can do forever. And they are handing over all their oil clients to the United States in the process, which they may never get back without offering below market pricing.

    The true market price is between $45 to $50 per barrel, the price where United States oil companies make money.

    Any effort by United States oil companies to price fix with OPEC will end in investigations that result in deep fines, and thus the market will set the price of oil eventually.
  • Johnny on March 06 2018 said:
    Why is nightmare?Let's remember what happened before cut.Most of OPEC countries and Russia increased production to maximum and than cut a bit.Nowadays these countries are earnings extra billions on higher oil price and they are very happy about that.They will be happy if thay can keep their current positions in the market.Additional demand if they can cover for them will be Ok.If not also OK while they are not losing currently positions.
  • Mamdouh G Salameh on March 06 2018 said:
    The International Energy Agency (IEA) has lost any credibility by hyping all the time about US shale oil and being off the mark in its assessment of future global oil developments. Its Oil 2018 report tries to project objectivity and farsightedness but unfortunately it fails in both accounts.

    The global demand for oil is projected to rise between 7.5-7.9 million barrels a day (mbd) between 2018 and 2023. US shale could provide something like 2.0 mbd or 25%-27% to global supply during that period, Iraq could add 2 mbd and other OPEC members including Kuwait, Saudi Arabia and Venezuela some 2.5 mbd totalling 6.5 mbd. From this total we have to deduct an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd, virtually equivalent to losing the current output of Iraq. So the net addition to global oil supplies by 2023 could be estimated at 1.7 mbd thus leaving a deficit of 5.8-6.2 mbd.

    Norway, Brazil and Canada will struggle to maintain current production with all Brazil’s production going towards satisfying domestic demand.

    OPEC and Russia will not maintain the cuts for ever. Once the global oil market has rebalanced completely during this year, OPEC and Russia will establish a mechanism beyond 2018 which works as a barometer. The mechanism will trigger proportionate production cuts if the inventories start to build or raise production if there are signs of tightening in the market. So OPEC can’t lose.

    As for the petrochemicals sector, Saudi Arabia will emerge as the world’s largest producer and exporter of petrochemicals. And despite a possible wider use of electric vehicles (EVs) in the next 50 years, Oil will remain dominant in global transportation.

    Oil will continue to reign supreme throughout the 21st century and probably far beyond.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • greg on March 06 2018 said:
    "Over the next three years, the U.S. will cover 80 percent of the world’s demand growth, the IEA says in its newly-released Oil 2018 annual report. Canada, Brazil and Norway will cover the remainder, leaving no room for more OPEC supply."

    Meanwhile the US remains a net importer of oil. This is Hans Christian Andersen stuff.
  • Joe on March 06 2018 said:
    Good article by Nick Cunningham. I guess the rate of oil production in the USA will be determined by the banks. As long as the banks keep lending, the oil companies will drill. There is no way the oil companies can increase production just off cash flow. Why? It’s a thing I call the 7 year rule. In any new shale development, after 7 years of growing production, the decline in production of the existing wells requires a large number of rigs just to replace the depleted wells. Witness the Bakken in North Dakota that requires 50 rigs drilling 24 hours per day but resulting in very little production growth. The banks don’t like that. The Permian is in year 6.
  • Kishore Kumar on March 06 2018 said:
    Long live American shale oil.
  • Citizen Oil on March 06 2018 said:
    Just as many analysts did not see the disruptive shale fracking technology coming, they have no idea when it will end. Add to this investors are already very angry they are not getting their fair share of returns, if any. That is just the beginning of activism. I have a feeling shale drillers are going gangbusters because they know how soon these areas will be depleted. Get the molecules out while you can .
  • Kshithij Sharma on March 08 2018 said:
    Total USA oil production will saturate at slightly over 12 mbpd. The additional oil requirement is expected to be 1-1.5 mbpd every year. It is meaningful to say that in next 3 yeas, 65% of oil demand growth will be met by USA production increase. 80% is an exaggeration.

    The real question now is about Russian shale oil. When Russia taps its shale oil, the increase in oil production will be tremendous. That is when the real supply increase will happen
  • John Brown on March 12 2018 said:
    OPEC is in a bad spot. If they don't restrict production they flood the market, especially with the huge increase in production coming from the USA, and the price of oil will crash. If they don't U.S. production will continue to increase, and likely at a faster pace than anyone thinks. However, OPEC can do the math. Its far better for them to sell restricted output at $65 a barrel, than 2x that amount at $25 a barrel. So that is the best case scenario for OPEC, and its also fantastic for the USA.
    As for Future supply? With oil over $60 a barrel, the USA is incented to make sure it can continue to produce in the future. With continued improvements in technology they will continue to do more with less, and I wouldn't bet on a future shortage in mid 2020s. In addition to knew technology making more oil available for less cost, the current situation is also great for renewables. It gives them a breathing space to keep inching up in market share, and lowering cost. Nobody is taking into account a break through in the renewables areas, but there's a lot of investment going in and probably sooner rather than later the cost will be competitive or less than carbon, and then we will truly be in a new world of clean, cheap, energy for the world.
  • Tony on March 15 2018 said:
    When America stops importing 13 million barrels a day, then I will begin to believe it, that America is a great Oil producer, all other are Show but tipical American !
    America with an army that spends and consumes more than a whole country like Scandinavia,
    is obviously very interested that the price of oil does not rise to much!
    This report can be seen on oilprice too !

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