‘Oil prices may drop further on potential glut’
Global oil supply could continue to rise at a rapid pace in 2020, surpassing the increase in demand.
This is expected to affect oil prices that have continued to hover between $60-65 per barrel in the last few months.
According to new figures from the International Energy Agency (IEA), non-OPEC supply could expand by a staggering 2.3 million barrels per day (mb/d), nearly double the expected increase in demand at 1.2 mb/d.
For Nigeria, there are concerns about the country’s potential to fund its N10.33trilion budget for the 2020 fiscal year if the price drops below the $57 benchmark.
That forecast doesn’t just depend on substantial growth from U.S. shale (although it does), but also on expected increases from Brazil, Norway and Guyana.
The surge in output complicates OPEC+’s task as Vienna approaches. The production cuts are currently set to expire at the end of March 2020, but the group is widely expected to extend that agreement through the end of the year.
“The hefty supply cushion that is likely to build up during the first half of next year will offer cold comfort to OPEC+ ministers gathering in Vienna at the start of next month,” the IEA said. “However, a continuously well-supplied market will lend support to a fragile global economy.”
The supply overhang creates problems for OPEC+. “The OPEC+ countries face a major challenge in 2020 as demand for their crude is expected to fall sharply,” the IEA said. “During the first half of 2020, the call on OPEC crude falls to 28.2 mb/d versus 30.2 mb/d in 4Q19.” In other words, the expected surge in supply from the U.S., Guyana, Brazil and Norway could force OPEC+ to back out more production.
“This highlights the need for another cut in output,” Commerzbank said in a note.
But the forecast has some issues with it. The IEA acknowledges the headwinds facing U.S. shale drillers.
“Capital discipline and investor apathy is restricting investment,” the agency said. Oilfield services companies are warning about a slowdown. Individual shale companies are also admitting that they will rein in growth prospects. At the same time, the oil majors are aggressively expanding drilling.
The IEA still sees U.S. supply growing at 1.2 mb/d in 2020, a figure that is unchanged from last month’s report, despite the wave of third quarter earnings reports that offered some evidence of a slowdown.
It is worth noting that the IEA is arguably at the optimistic end of a lot of U.S. shale forecasts these days. For instance, Goldman Sachs lowered its supply forecast for 2020 from U.S. shale to just 600,000 bpd.
IHS Markit goes further, predicting a more dramatic slowdown. The firm sees U.S. supply growth of just 440,000 bpd in 2020, a rather stark divergence from the IEA figures. U.S. shale is “slowing down fast,” IHS Markit said in a report earlier this month. In 2021, it sees shale “flattening out.”
“Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” Raoul LeBlanc, vice president for North American uncoventionals, IHS Markit, said in a statement. “This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.”
On the demand side of the equation, the IEA trimmed its forecast slightly to 0.985 mb/d, down from 1 mb/d previously. The agency sees that figure rebounding to 1.2 mb/d next year.
“Recent data point to a significant slowdown in world industrial production growth since the end of 2018. The IMF attributes this slowdown to a sharp drop in car production and sales, weak business confidence and slowing Chinese demand,” the IEA said.
Needless to say, the outcome of the U.S.-China trade war has a great deal of influence on demand. The IEA said that oil demand would be 400,000 bpd higher in 2020 if tariffs were removed. But the general assumption is that most of the tariffs will remain, notwithstanding the pending “partial deal” that could suspend or delay some levies.
Turning back to Vienna, OPEC+ faces a tough choice as it prepares to meet. If the IEA is correct and global supply growth is expected to surge next year, the group risks a price crash if it doesn’t cut deeper. However, the ministers can probably take comfort in the fact that U.S. shale is slowing down dramatically and a growing number of analysts think the IEA is overestimating shale’s resilience.
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