In the aftermath of the wave of aggressive forecasts for supply growth from U.S. shale lately, OPEC added its voice to the mix on Monday, acknowledging that its American rivals would add more oil onto the market than it previously expected.
According to OPEC’s latest forecast for 2018, non-OPEC supply will rise by 1.4 million barrels per day (mb/d) this year, an upward revision of 250,000 bpd from last month’s forecast. That is a rather large revision and it represents an acknowledgement that the cartel’s strategy of keeping upwards of 1.8 mb/d of supply off of the market has allowed a lot of runway for U.S. shale to ramp up. “[T]he steady oil price recovery since summer 2017 and renewed interest in growth opportunities has led to oil majors catching up in terms of exploration activity this year, both in the shale industry and offshore deep water” OPEC wrote in its report.
Yet, OPEC’s president dismissed the warning signs from U.S. shale, stating that soaring output would not derail OPEC’s calculations or strategy. “Shale is coming and the expectation is that it will come stronger than in 2017, and this is something that we have to watch,” OPEC president and UAE energy minister Suhail Al Mazrouei said, according to Bloomberg. “But considering all factors, I don’t think it will be a huge distorter of the market.”
The increase in output on an annual basis will be impressive: U.S. production will rise by 1.3 mb/d compared to 2017 levels, according to OPEC’s numbers. But OPEC sees most of the gains from the U.S. to be heavily frontloaded, with dramatic gains coming in January, February and March (on top of the huge increases in the fourth quarter of 2017).
Output is choppier for the rest of the year, with increases in some months, but dips in others. Crucially, in December 2018, OPEC is forecasting U.S. oil production at 10.25 mb/d, which is essentially flat compared to current levels.
Moreover, it also sees robust demand offsetting some of the concerns about too much supply. OPEC revised up its demand forecast by 60,000 bpd from last month’s report. The group also tried to remind the world that even as U.S. shale continues to rise, so does demand. “Cumulatively, between 2015 and 2017, the world has added around 5 mb/d of demand for oil products on the back of healthy economic conditions globally and a relatively steady product price environment.”
For this reason, OPEC still sees a lot of upside in sticking with the cuts and letting the market continue to balance. It will still take some time to drain inventories, especially given the fact that inventories will likely increase in the first half of the year. “In line with the existing overhang, the market is only expected to return to balance towards the end of this year,” OPEC wrote in its February Oil Market Report.
At the same time, the threat of new supply from OPEC is also looming just over the horizon. Compliance remains strong — OPEC production in January was mostly unchanged from December levels — and by all indications, compliance should remain elevated.
Yet, as S&P Global Platts notes, OPEC members are gearing up for increases in production capacity as the oil market continues to move closer to balance. They may not ratchet up output just yet, but they are beginning to signal their future plans to do so.
For example, Kuwait’s oil minister recently stated that his country’s capacity would rise to 3.225 mb/d, compared to its current 3 mb/d. Iran’s oil minister promised (threatened?) to add 100,000 bpd within days after the expiration of the OPEC agreement. UAE hopes to add 500,000 bpd of capacity over the course of this year. Finally, Iraq has a goal of having the ability to export 5 mb/d by the end of 2018.
“We will not wait until the excess inventories get to zero before we do something if needed,” one source told S&P Global Platts.
To be sure, these are capacity additions, not production. The output will likely remain on the sidelines as long as OPEC continues to work together and the supply curbs are kept in place. But as S&P Global Platts argues, the mere fact that more officials from these key oil-producing countries are advertising their pending capacity additions could signal an eagerness to ramp up production.
The comments come as several oil market analysts have warned that OPEC could overtighten the market. Goldman Sachs recently argued that the market is probably already balanced, and that because inventory data is published on a several-month delay, OPEC might end up draining inventories below the five-year average. That could send prices up by summer, when demand is at a seasonal peak.
Overall, the OPEC report is not nearly as bearish as the corresponding reports from the IEA and EIA, and the group offers a “stay-the-course” mantra in the face of surging shale supply, predicting a rebalancing later this year.