The fear of OPEC that gains made by its production cuts could be neutralized by another surge of shale oil could be coming true.
The International Energy Agency said on Friday that there would be “explosive” growth in the U.S. oil output this year even as there is a rally in global oil prices. And this was but just one of the many voices that warned of an impending surge in output which would remind one of the “heavy days” from the first shale boom. The voices include Goldman Sachs group Inc. and OPEC itself.
The risk of their own success turning against them would potentially overshadow success indicators such as achieving of a three-year high in oil prices and fast diminishing global supply glut at a slated meeting tis weekend of the Organization of Petroleum Exporting Countries and its allies such as Russia in Oman.
“The big 2018 supply story is unfolding fast in the Americas” the IEA said in its monthly report. “Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.”
The IEA said that output growth of 700,000 barrels a day were achieved by rivals even as there had been a moderate price response to the cuts led by OPEC for most part of 2017. And the biggest increase since the height of the shale boom would be recorded as the OEA anticipates an expansion of 1.7 million this year in the output of non-OPEC suppliers as part of the reaction of producers to the recent increase in price of Brent crude reaching over $70 a barrel.
And if that happens, it would not be a beneficial outcome for OPEC and its allies going ahead this year. IEA data shows that U.S. crude output could even be close to the output of Russia this year and overtake output of Saudi Arabia as the complete advantage of the total of 1.3 million barrel-a-day expansion in the global oil market would be taken by the rival suppliers. And the oil inventories globally are still more than 90 million barrels above OPEC’s target and therefore extension of the OPEC and its allies’ production cuts would potentially have little impact on the oil inventories. This would make things worse for the oil industry.
There are however some suffers anticipated in 2018 even though the U.S. would make substantial gains. According to the IEA, there is more trouble in store for Venezuela which recorded its worst year of production in 2017 in over 30-year period.
“Given Venezuela’s astonishing debt and deteriorating oil network, it is possible that declines this year will be even steeper than the 270,000 barrels a day in 2017,” the report said. Yet, the IEA doesn’t see a “clear sign yet of OPEC turning up the taps to cool down oil’s rally” or “compensate for a precipitous drop in supply from Venezuela.”
“We see the IEA’s assessment as more realistic than OPEC’s,” analysts at Commerzbank AG said in a note. “OPEC’s assumption of non-OPEC supply is far too low.”
(Adapted from Bloomberg.com)