It is likely that the production surplus will persist through 2019 and possibly 2020 based on EIA forecasts for production and consumption. EIA’s forecast for quarterly WTI price is below $65 per barrel through 2020.
The global supply and demand outlook is similar. World oil supply-demand balance reached an over-supply of +1.6 mmb/d in the 4th quarter of 2019. It has fallen to around +0.6 mmb/d today (Figure 4).
Figure 4. World over-supply of oil expected to peak at 1 million barrels of oil per day in the second quarter of 2019.
Source: IEA, EIA and Labyrinth Consulting Services, Inc.
Forecasts based on EIA supply and IEA demand suggest that the surplus will rise to +1 mmb/d in the second quarter and then, decline through the rest of the year.
Market sentiment has turned bullish since OPEC+ cuts were announced late last year even though concern remains about the strength of the global economy and the status of U.S.-China trade talks.
I am less concerned about those demand-side issues than about the ongoing over-production in the world generally and in the Permian basin in particular. Despite talk of fiscal restraint by shale companies and more limited capital supply from credit markets, production continues to increase.
I share Khalid Al-Falih’s concerns that world inventories are moving in the wrong direction for a sustainable price recovery beyond recent gains. Some analysts seem to forget that world oil prices have been on OPEC+ life support since late 2016 and apparently need even stronger measures in 2019.
The oil-price collapse of 2018 should have sent a clear message to producers to change their behavior or risk further crushing price reactions going forward.