The US 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 US
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 US, 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 US 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.
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 US, 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.
“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 US shale will provide a lot of fodder for conversation
for both shale boosters and anxious OPEC representatives.
Source: RT