Just as the U.S. shale industry is slowing down, oil production in other non-OPEC countries is on the rise.
Output in U.S. shale grew substantially in 2019, although at a slower rate than in years past. More importantly, as investors lose interest and capital markets become unfriendly, shale E&Ps are going to have an increasingly difficult time financing drilling outside of their own cash flow. As companies are forced to cutback in the pursuit of positive cash flow, supply growth will likely slow even further.
Even if their claim that the oil market could remain in a state of surplus on the order of 700,000 barrels a day (b/d) in the first quarter of 2020 is true, such a surplus will hardly register on the radar of oil prices. Despite a glut estimated 4.0-5.0 million barrels a day (mbd) and caused by almost two years of trade war, oil prices held its ground at $60-$67 a barrel.
However, the IEA’s projection of a surplus of 700,000 b/d is unsubstantiated like most of its projections. Norway’s production has been declining at a rate of 2.5% for the last ten years from 2.458 in 2008 to 1.81 mbd in 2019. Brazil’s production, on the other hand, has also been declining at a rate 1.4 since 2018 and could hardly add a single barrel to its production in 2020. Mexico’s production is in a free fall and China’s production is stagnant. So there would be no addition of 820,000 b/d in 2020 as the IEA is claiming.
As for US shale oil production Baker Hughes oil rig count has been telling a story of a US shale oil industry facing a steep oil rig count decline, confirmed production slowdown, declining well productivity and investments, bankruptcies and eventual demise. 2019 was the year in which the hype around US shale oil production finally burst.
The US Energy Information Administration’s (EIA’s) figures of US production are to say the least over-stated by at least 2 mbd. This means that US oil production will average this year at 10.8 mbd and around 10 mbd or even less in 2020 and will continue to decline until its demise in 5-10 years from now.
Therefore, any glut remaining in the market in 2020 is the remains of the huge glut caused by the trade war. If the de-escalation of the trade war continues into 2020, this glut will decline quickly helping oil prices to surge above $70 a barrel in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London