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Louisiana Light • 6 days | 73.77 | +0.89 | +1.22% | ||
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Bonny Light • 135 days | 78.62 | -2.30 | -2.84% | ||
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Opec Basket • 6 days | 73.91 | +1.03 | +1.41% | ||
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Mars US • 425 days | 73.93 | -1.23 | -1.64% | ||
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Gasoline • 15 mins | 2.020 | +0.011 | +0.53% |
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Bonny Light • 135 days | 78.62 | -2.30 | -2.84% | ||
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Girassol • 135 days | 79.56 | -1.80 | -2.21% | ||
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Opec Basket • 6 days | 73.91 | +1.03 | +1.41% |
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Peace Sour • 2 days | 64.04 | +0.39 | +0.61% | ||
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Light Sour Blend • 2 days | 65.89 | +0.39 | +0.60% | ||
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Syncrude Sweet Premium • 2 days | 69.14 | +0.39 | +0.57% | ||
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Central Alberta • 2 days | 64.09 | +0.39 | +0.61% |
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Eagle Ford • 6 days | 67.08 | +0.98 | +1.48% | ||
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Oklahoma Sweet • 6 days | 67.00 | +0.75 | +1.13% | ||
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Kansas Common • 6 days | 57.43 | +0.98 | +1.74% | ||
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Buena Vista • 7 days | 76.54 | -0.48 | -0.62% |
The Druzhba pipeline—Russia’s aging oil…
Crude oil prices ticked higher…
Despite a recent court ruling…
Despite the OPEC+ cuts, the oil market is still facing a supply surplus in 2020, according to a new report from the International Energy Agency (IEA).
OPEC+ announced additional cuts of 500,000 bpd, which sounds more impressive than it is because the group was already producing under its limit. In November, for instance, OPEC was producing 440,000 bpd below the agreed upon ceiling.
Saudi Arabia agreed to shoulder an additional 400,000 bpd of voluntary cuts. But the deal also exempts 1.5 million barrels per day (mb/d) of Russia’s condensate production, allowing Russia to actually increase condensate output by 0.8 mb/d.
Still, the deal should take supply off the market. “If all the countries comply with their new allocations and Saudi Arabia delivers the rest of its voluntary cut of 0.4 mb/d, the fall in production volume versus today will be about 0.5 mb/d,” the IEA said.
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OPEC said in its own report that the oil market would be largely in balance in 2020, albeit with a temporary glut in the early part of the year. The IEA sees inventories building at a rate of 0.7 mb/d in the first quarter.
The IEA cut its forecast for non-OPEC supply growth from 2.3 mb/d to 2.1 mb/d, due to weaker growth from Brazil, Ghana and the United States. The U.S. typically gets all of the attention, but disappointing news from Brazil and Ghana also led the IEA to revise forecasts lower.
Notably, Tullow Oil revealed a major disappointment from its Ghana operations, causing a complete meltdown in its share price this week. Its stock fell nearly 70 percent in a single day as investors overhauled their valuation of the company. Tullow admitted that its production from Ghana would decline in the years ahead.
But even the combined effect of slower non-OPEC production growth and the OPEC+ cuts is not enough to erase the glut entirely. “[W]ith our demand outlook unchanged, there could still be a surplus of 0.7 mb/d in the market in 1Q20,” the IEA said.
“Even if they adhere strictly to the cut, there is still likely to be a strong build in inventories during the first half of next year,” the IEA warned. Related: Can Argentina Replicate The U.S. Shale Boom?
But the forecasted glut largely depends on ongoing production growth from U.S. shale drillers. The IEA admits that there will be a slowdown, but is still optimistic on production growth, with gains of 1.1 mb/d in 2020, compared to 1.6 mb/d this year.
The agency has consistently been at the optimistic end of the spectrum regarding shale growth, even as major investment banks long ago slashed their forecasts. The IEA cut its U.S. supply forecast by 110,000 bpd from last month’s report, but at 1.1 mb/d, its figure still seems generous. The IEA is betting that the oil majors, who are less responsive to lower prices and problems with cash flow, will continue to scale up drilling.
Meanwhile, a new report from IHS Markit highlights the accelerating rate of decline among the U.S. shale complex, a decline rate that grows in tandem with production increases. “Oil and gas operators in the Permian Basin, the most prolific hydrocarbon resource basin in North America, will have to drill substantially more wells just to maintain current production levels and even more to grow production, owing to the high level of recent growth,” IHS said in a statement. The base decline rate in the Permian has “increased dramatically” since 2010.
“Base decline is the volume that oil and gas producers need to add from new wells just to stay where they are—it is the speed of the treadmill,” said Raoul LeBlanc, vice president of Unconventional Oil and Gas at IHS Markit. “Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate. As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.”
The firm sees U.S. production growth of only 440,000 bpd in 2020, before flattening out in 2021. If this proves accurate, OPEC+ might not need to worry as much.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon.
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Therefore, no one should expect an oil glut estimated at 4.0-5.0 million barrels a day (mbd) to evaporate completely in 2020 even with an end to the trade war.
Still, an end to the war would definitely stimulate the global economy and the demand for oil thus causing the glut to start declining and oil prices to start surging aided by both OPEC+ production cuts and a steeply slowing down of US shale oil production.
The claim by the IEA that non-OPEC supply particularly from the US, Brazil, Norway and Ghana will expand by 2.1 million barrels a day (mbd) in 2020 is not only self-delusional but also a plain lie.
US shale oil production is already encountering faster declining rates than with the old wells according to IHS Markit and a steady decline in oil rig count.
Therefore, US oil production could average less than 11 mbd in 2019 and not 12.29 mbd as the US Energy Information Administration (EIA) is claiming and around 10 mbd if not less in 2020.
It will take Brazil more than 10 years to be able to raise its oil production significantly above the current production of around 2.6 mbd because of high costs of production from the pre-salt reserves. And with break-even price of $40 per barrel, Brazil needs oil prices exceeding $80 a barrel to attract major foreign investments as evidenced by the recent flop of its oil auction.
As for Norway, its oil production has been declining by an average annual rate of 2.5% from 2.6 mbd in 2008 to 1.84 mbd in 2018. The new production from the Johan Sverdrup field in the North Sea could bring online some 660,000 barrels a day (b/d). Ghana is yet to start any production.
Therefore, instead of adding 2.1 mbd as the IEA is hyping, the US, Brazil and Norway would be producing 1.44 mbd less in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London