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The oil market recorded a sizeable surplus in the first half of 2019, much larger than expected. In the future, supplies are expected to tighten in the second half of the year, but this may be only a pause before the overabundance returns.
According to the latest International Energy Agency's oil market report, world oil supply has surpassed demand by about 0.9 million barrels per day (mb / d) in the first six months month of this year. This retrospective belies the feeling that prevailed just a few weeks ago. For example, the IEA said the oil market had a surplus of about 0.5 Mb / d in the second quarter, while the agency previously thought that there would be a deficit of 0.5 Mb / d.
"This surplus adds to the huge stocks built in the second half of 2018, when oil production rose, as demand began to weaken," said the IEA. "Clearly, the tighter market is not a problem at the moment and any rebalancing seems to have been farther into the future."
The extension of OPEC + reduces the first quarter of 2020 by raising a great deal of uncertainty, but the IEA said that this "does not change the fundamental prospects of". an oversupplied market ".
The findings echo those of OPEC itself, which had stated in its report published a day earlier that "the call to OPEC" would be significantly lower next year . The increase in shale production in the United States will exceed the additional demand this year and next year, which means that the market could record a large surplus in 2020. In other words, OPEC + is confronted with an enigma: keeping intact its production reduction offer and coping with a growing glut, or cutting further. Oil prices rise as the number of rigs goes down
"On our balances, assuming that OPEC production is constant at the current level of about 30 mb / d, the 1Q20 shares could increase by about 136 mb. The call on OPEC crude at the start of 2020 could fall to just 28 Mb / d, said the IEA. OPEC produced 29.83 mb / d in June.
OPEC has increased demand for its oil to a level of 29.3 Mb / d next year, which is certainly a sizeable gap from the IEA figure. However, the conclusion is the same: OPEC may have to reduce its production further if it wants to avoid lower prices. OPEC figures indicate that production may need to be reduced by 560,000 b / d; AIE implies a larger reduction of 1.8 Mb / d.
The IEA has been diplomatic in stating that the threat of a renewed surplus "is a major challenge for those who have taken on the task of managing the markets". this year. A few days earlier, the US EIA lowered its estimate of demand to 1.1 mb / d. The Paris-based IEA was more optimistic about the rebound in economic growth, even though it downgraded second-quarter demand growth from 450,000 bpd to just 800,000 bpd in a year.
The top three forecasters – OPEC, IEA and EIA – are seeing strong growth in supply from American shale. Specific figures vary, but they generally find that non-OPEC production (US shale accounting for most of the total) increases by about 2 mb / d this year and even more so next year. In other words, the growth of non-OPEC supply for 2019 and 2020 is greater than the demand. Related: Oil and gas discoveries increase in oil-risk areas
The least uncertainty in these forecasts is the current slowdown in the American shale industry. As Bloomberg pointed out, "pipeline limits, reduced wellbore flow, low natural gas prices, and high land costs" are holding back drillers in Texas. The financial results are bad and quite dark for a long time. Despite huge increases in production (or, because of such extraordinary growth), North American oil companies have spent $ 187 billion in cash since 2012.
The big question is whether the staggering growth rate starts to slow as investors get angry at the sector. At present, there is only sparse evidence, the drilling rig count and the pace of growth appearing to be slowing down. Bloomberg has cited more than half a dozen shale drillers that have drastically reduced their production growth forecasts by slowing the pace of drilling. It remains to be seen whether, on the whole, American production begins to flatten.
If this happens, OPEC would be greatly relieved, as his task of rebalancing his task would be a little easier. Otherwise, by 2020, the cartel could be forced to further reduce its production.
By Nick Cunningham from Oilprice.com
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