The Organization of the Petroleum Exporting Countries and non-OPEC partners led by Russia, are now nearly two years into their production agreement and are expected to roll-over the accord through the end of June 2020 in order to stabilize crude markets and prices. Their goal has so far been elusive amid faltering demand growth and surging production from non-cartel members such as the U.S. and Brazil, which is expected to decrease OPEC’s market share in some of the world’s fastest-growing markets.
In their annual World Oil Market Outlook released in November, OPEC acknowledged that its global market share will drop to 31% in 2024 from 37% in 2018, as production declines by a staggering 2.2 million bpd within the next five years. Not surprisingly, many OPEC members aren’t keen to give up market share, and have been relentlessly producing above their pledged quotas, clouding the prospect of OPEC+ reaching consensus on an extension of the deal.
The claim by the IEA that non-OPEC supply particularly from the US, Brazil and Norway will expand by 2.3 million barrels a day (mbd) in 2020 is not only self-delusional but also a plain lie and I will explain why.
US shale oil production is already in steep decline as evidenced by the continued fall in oil rig count. US oil production could average under 11 mbd in 2019 and not the 12.8 mbd claimed by the EIA and is projected to drop to around 10 mbd 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).
Therefore, instead of adding 2.3 mbd as the IEA is hyping, the US, Brazil and Norway would be producing 1.64 mbd less in 2020.
OPEC+ is well advised not to be seduced into deepening its cuts since such a measure will be futile while the trade war is going on as it will end up losing market share with no positive impact on prices. Furthermore, Russia and most OPEC members will never agree to that.
It is possible, however, that OPEC+ might agree to roll over the current cuts for a few more months and wait for an end to the trade war. As long as the trade war continues, oil prices will hover around the lower $60s.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London