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. As Oil Price writes in the article IEA: Huge Oil Glut Coming In 2020, 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. 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.
“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.
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.
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.
