From short-term oversupply to long-term supply shock, oil markets remain confused on future outlook

From short-term oversupply to long-term supply shock, oil markets remain confused on future outlook

Both OPEC and the International Energy Agency (IEA) warned of too much supply this week, putting more pressure on Saudi Arabia and Russia to curb production next year.

OPEC says world oil demand will rise by 1.29 million bbl/day in 2019, 70,000 bbl/day lower than its previous forecast due to a slowdown in emerging markets. Non-OPEC supply is expected to rise by 2.23 million bbl/day next year, 120,000 bbl/day higher than its previously forecast. The cartel warned that non-OPEC supply will outpace growth in world oil demand, by as much as 1.36 million bbl/day if there's no change in output from here. 

OPEC is therefore expected to ask its members for another 1.4 million bbl/day in production cuts going into 2019. Nigeria and Libya, who had previously been exempted from quotas, may now be asked to participate in the reductions.

Russia has so far indicated a reluctance to take part, calling production cuts "not the right systematic approach" to stabilizing oil prices. Russia pumped a record 11.41 million bbl/day in October. Saudi Arabia is also expected to hit a record 11.0 million bbl/day in November, but promises to reduce exports in December.

Output from Iran has been dented by the reinstatement of US sanctions, but is expected to recover now that the Trump Administration has granted waivers to its largest buyers. OPEC's next official meeting will take place on December 6 in Vienna, where 2019 policy will be discussed.

A big part of the problem is the rapid growth in output from US shale, which appears to have taken the industry by surprise. According to the US Energy Information Administration (EIA), total US production hit a record 11.7 million bbl/day last week, up 1 million bbl/day from just last spring. The EIA now says it expects US production to top 12 million bbl/day by the middle of next year.

Meanwhile in Paris, the IEA warns that global stockpiles will rise by 2 million bbl/day during the first half of next year. The IEA left its forecast for global demand growth unchanged at 1.3 and 1.4 million bbl/day for 2018 and 2019, but also cut its forecast for non-OECD demand growth by 165,000 bbl/day. Non-OPEC production has grown 3.5 million bbl/day over the past year, mostly from the US. The IEA reminds producers that the oil industry "works best when it works together," calling on "diplomacy" to ensure market stability.

While warning of too much supply in 2019, the IEA also warns there isn't enough investment in conventional oil, putting the global economy at risk of a "supply crunch" in the future. The agency says the world needs an extra 7.5 million bbl/day by 2025, but new production may not be enough to offset natural declines. Under the current trajectory, world oil markets are relying heavily, perhaps too heavily, on US shale to keep rising in order to keep up with rising demand.

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