Demand growth fears have had a detrimental impact on crude prices over the last couple of days, with Brent dipping firmly under $60 a barrel and WTI racing towards the $50 psychological benchmark, yet a cursory review of the EIA August STEO reveals a fundamentally bullish picture for the oil market.
After peaking at 102.49M barrels in October 2018 global oil supply has declined by over 2M bpd barrels as of July 2019. Furthermore, despite an expected 1.65M bpd growth in US liquids supply between July and December 2019, global oil supply is still expected to average 102M bpd in December 2019, exactly where it was a year prior. The reason for the stalling in global oil supply growth is the decline in OPEC’s production by 2.7M bpd between November 2018 and today.
In the meantime, despite worries about global oil demand growth, oil demand is still growing and has not crawled to a halt as is the case with supply. Between July 2018 and July 2019, global oil demand grew by 740,000 barrels per day against 670,000 barrels per day decline in global supply during the same period as per the latest EIA numbers.
Going forward and Looking at the EIA’s global oil supply assumptions between July and December 2019, we notice that non-OPEC supply is expected to grow from 65.5M in July to 67M barrels in December, or 1.5M barrels growth. US supply is expected to grow by 1.65M barrels, and global oil supply is expected to grow by 1.53M barrels. Parsing through these numbers, we can easily see that US supply is not just expected to deliver all the growth in global oil supply for the rest of the year, but is also expected to compensate for declines elsewhere.
There is no question that US oil supply will continue to grow in the coming months, however the extent of the growth in US supply as per the EIA models appears highly inspirational. Against a background of a declining rig count, flattening rig productivity, and imploding oil prices, the likelihood of US oil production growing as briskly as the EIA expects in the next six months is highly suspect. As I have highlighted in a previous article on Oilprice.com, US shale supply is exceedingly sensitive to changes in the oil price. Should WTI dip below $50 in the coming weeks, the extent of the slowdown in US supply growth in the coming months (and in 2020) is likely to meet if not exceed the expected slowdown in global oil demand growth as a result of the US/China trade war. US shale oil has not only introduced a cap on oil prices, it has also introduced a floor.