Despite US sanctions on Iran, Venezuela’s ongoing crisis, Libya being at risk of conflict-related oil disruption and Russian oil exports curtailed by contamination problems, oil prices have weakened considerably, plummeting from close to $69/barrel May 28 to below $62/b May 31.
Saudi Arabia had promised to make up any lost barrels resulting from the US’ tough stance on sanctions, but there has been little need to do so. The OPEC kingpin produced 9.82 million b/d in April, according to third-party reports, marginally less than in March.
Fears of disruptions to Libya’s oil supplies have so far not materialized, but that doesn’t mean they should be discounted. Libya remains a flashpoint. Oil revenues are currently distributed by a combination of the National Oil Company, the only body authorized to export crude, and Libya’s central bank, both located in Tripoli, which is currently being besieged by General Khalifa Haftar’s Libyan National Army (LNA). The LNA and its allies control the bulk of oil production and distribution infrastructure.
As the military situation appears to have reached a stalemate and the battle becomes more attritional, oil revenues are likely to prove the weapon that tips the balance. In a free for all, it is by no means clear that Haftar’s alliance will hold together. NOC chief Mustafa Sanalla warned in May that 95% of the country’s oil production could be lost – about 1 million b/d.
However, the oil market appears to be taking a broader perspective, influenced by the break down in Chinese-US trade talks, an increasingly poor outlook for world trade and the US economy, despite high levels of US consumer confidence, and no let-up in the uncertainty caused by Brexit.
But there is a bigger underbelly to the oil market’s weakness, which reflects the gradual recovery of longer-cycle oil production, following a successful period of cost-cutting since the collapse of oil prices in 2015.
The US Energy Information Administration forecasts an increase in non-OPEC total liquids supply of 2.47 million b/d in 2020, of which 1.46 million b/d is expected to come from the US. The EIA’s estimate for growth in world consumption in 2020 is a robust 1.53 million b/d, which may prove high if global trade growth continues to slow.
The US is still the largest contributor by a country mile to non-OPEC liquids supply growth, but the Brent/WTI differential remains wide, with WTI slumping close to $53/b at end-May. If prices are sustained at this level, the US oil rig count – down 10% from a recent peak in November - looks unlikely to rebound.
Other non-OPEC oil producers are forecast to increase output by 1.01 million b/d next year. If realized, this would be the largest increase in non-OPEC supply minus the US in 10 years and the third best annual performance since 2003.
The expected supply increase has its uncertainties but it is broad-based.
Despite being hamstrung by its lack of export infrastructure and having seen a dramatic drop in capital investment in oil sands in recent years, Canadian oil production is expected to jump 360,000 b/d in 2020, according to the EIA. The challenge will be getting this oil to market, a problem not helped by the recent announcement of delays to Enbridge’s Line 3 Pipeline Replacement Project.
In Brazil, the EIA foresees an increase of 240,000 b/d in 2020. Petrobras and Shell are expected to bring four 150,000 b/d Floating Production Storage and Offloading (FPSO) vessels into operation this year, two of which have already started production on the sub-salt Buzios field. Although forecasts of rising Brazilian crude output have disappointed before, growth from 2.6 million b/d to 3.24 million b/d in 2022 looks likely to be realized as the long pipeline of FPSO additions bears fruit.
Meanwhile, Norwegian output can expect a major boost from the start-up of the 440,000 b/d Johan Sverdrup field, which is expected in November. The production and development plans for Phase 2, which will add 220,000 b/d by end-2022, was approved by the Norwegian Petroleum Directorate May 15. The NPD predicts a jump in total liquids output next year of 300,000 b/d.
And waiting in the wings is new kid on the block Guyana. US major ExxonMobil’s string of offshore discoveries in the country is moving ever closer to production. 120,000 b/d is expected from the Lisa field in early 2020. ExxonMobil has said there is potential for five FPSOs on the Stabroek field producing 750,000 b/d by 2025.
Additional smaller non-OPEC gains are expected in 2020 from Australia, Oman and Qatar, as well as a potential 230,000 b/d rise in Russian production.
Russian output is currently being curtailed by the need to clean out the 1 million b/d Druzhba pipeline following contamination. Russian energy ministry data showed crude production falling to 11.11 million b/d in May, down from 11.23 million b/d in April.
Russia will attempt to boost its seaborne exports while the estimated six to eight-month clean-up operation continues, but the shortfall in May suggests Russia will meet its obligations to the OPEC+ deal whether it intended to or not. Russian producers will consequently want a rapid recovery next year.
Overall, it is not a pretty picture for OPEC as it approaches its next meeting. While US shale is dynamically price responsive, non-OPEC producers beyond the US are providing an additional challenge to the organization’s market share. They are putting in place long-life assets, which, once the capital is sunk, will produce regardless of market conditions.
Unless one of the oil market’s flashpoints ignites – Libyan disruption, Iranian threats to the Strait of Hormuz or further collapse in Venezuela – any wobbling on OPEC’s current production limits is likely to send the market lower still.