Last week, BP and the International Energy Agency (IEA) presented their key forecasts and analyses of energy markets. The basis for these presentations were their respectively published reports, the “Statistical Review of World Energy 2019” and “Oil 2019 – Analysis and Forecasts to 2024.” Yet as the analysts highlighted the rise of U.S. production to new heights and measured demand growth, uncertainty about the trajectory of domestic shale production was marked out as a potential supply concern.
Last year, the United States broke all records for the largest annual increase in oil production
The most notable development in 2018 was the continued rise of the United States as a dominant oil producer. Last year, the United States broke all records for the largest annual increase in oil production, and both BP and the IEA expect U.S. production to drive global supply growth in the coming years. The Organization of Petroleum Exporting Countries (OPEC), on the other hand—long the most dominant producer in the oil market—saw a decrease in production. However, despite their difficulties, OPEC remains a dominant force in the market, accounting for more than 80 percent of global reserves.
While presenting BP’s report, Spencer Dale, Group Chief Economist for BP, likened the oil market to a play with two main characters: a dull, plodding, dependable uncle, and his excitable, raucous young niece. “The plodding uncle is oil demand, and the excitable young niece running around is oil supply. And that’s what again happened last year,” Dale said.
Dale reported that global oil demand in 2018 grew at a relatively strong, yet steady rate of 1.4 million barrels per day (Mb/d). This largely accorded with the IEA’s demand prediction in their March “Oil 2019 – Analysis and Forecasts to 2024.” Similarly, the IEA’s Head of Oil Industry & Markets Division, Neil Atkinson, said the IEA predicts demand to grow at a slightly lower rate of 1.2 Mb/d for the next few years, with a cumulative growth of 7.1 Mb/d by 2024.
Source: International Energy Agency (IEA)
Atkinson also said that oil demand will not peak within the next five years, and that a peak before 2030 is unlikely. This is due, in part, to underlying drivers in demand growth, especially in Asia; consumers are growing wealthier and increasing their consumption of goods and energy.
Although nearly two-thirds of the rise in global oil demand came from China and India, the United States also contributed significantly to global demand growth. With a 0.5 Mb/d increase in 2018, the United States witnessed its largest growth in oil demand in over 10 years. Dale attributed this increase in large part to the growing size of the petrochemical industry, especially in the U.S. Demand for petrochemical-related products, especially ethane, contributed to roughly half of overall oil demand growth in 2018. In the U.S., petrochemical products are becoming even more globally competitive because they can be produced largely from inexpensive ethane feedstock made available by the shale revolution.
On the supply side, global oil production grew by 2.2 Mb/d in 2018, outstripping demand by nearly 0.8 Mb/d. The United States alone accounted for almost all of this growth, posting an increase in oil production of 2.18 Mb/d in 2018 – the largest single-year production increase by any country ever.
The IEA predicts that by 2021 the U.S. will be a net oil exporter, ending 75 years of import dependence and further solidifying the United States’ role as a leading producer in the global oil market. By 2023, the IEA projects the U.S. will overtake Russia in gross oil exports, closing in on Saudi Arabia as the global leader in exports by 2024. What was not mentioned in the presentations, however, is that the United States will still be a gross importer of oil for its refineries due to locational and quality issues.
Shale production predictions
Despite its record-breaking growth, Dale also noted that the unexpected rise of the U.S. shale industry makes it difficult to accurately predict the trajectory of U.S. oil production. This difficulty stems in large part from the diverse range of influences impacting U.S. shale production. Among them are infrastructure, new geology, and especially the availability of capital.
The unexpected rise of the U.S. shale industry makes it difficult to accurately predict the trajectory of U.S. oil production
“The pace at which tight oil grows is also affected by the availability of finance, in a way which big oil isn’t,” Dale said. “If you said to me, ‘What are the biggest factors affecting the growth of tight oil this year?’ I think I would put the geology as a sort of third on that list and the other two things, I think, are more important.”
The IEA expects the American shale industry to make the U.S. the most significant driver of global oil supply for the next six years. By 2024, the IEA predicts total U.S. supply will grow by 4 Mb/d – 70 percent of their forecasted global supply growth.
Source: International Energy Agency
The IEA expects U.S. shale oil production to increase to 7.43 Mb/d in 2019, and 9.59 Mb/d by 2024. If oil prices increase, however, the IEA believes U.S. shale production could rise even higher; if Brent reaches $70 a barrel (bbl), the IEA predicts an additional increase of 1.35 Mb/d by 2024, with a further increase of 1 Mb/d if Brent achieves $80/bbl.
Source: International Energy Agency
OPEC+ Coordination to Continue
Outside the U.S., BP reported a 0.3 Mb/d decrease in OPEC’s oil production in 2018. While Saudi production grew by 0.4 Mb/d, Iranian and Venezuelan output fell by 0.3 Mb/d and 0.6 Mb/d, respectively. By 2024, the IEA projects Iran’s supply will decrease by 1.19 Mb/d, and Venezuela’s will fall by 0.61 Mb/d – but they say that changes in political factors could dramatically alter these predictions. The IEA predicts OPEC’s overall capacity will be half a million barrels lower in 2024 than it is today.
Atkinson added that OPEC is adjusting to a more competitive world with increasing oil production from the U.S. and other non-OPEC countries such as Norway and Brazil, although OPEC still holds considerable influence. Moreover, Russian efforts to influence crude cannot be underestimated—in the short-term, Atkinson believes, Russia will continue to cooperate with OPEC due to oil price volatility, but the long-term picture is less clear.
According to Dale, OPEC’s difficulties in stabilizing production in 2018 should not necessarily be taken as a sign of OPEC’s decline, but is rather indicative of the inherent challenges in attempting to manage an uncertain global market under the influence of a variety of political factors: trade disputes between the U.S. and China, escalating tensions in the Middle East, and ongoing political uncertainty in Venezuela. OPEC announced this week it will hold its next meeting on July 1-2 to further discuss production cuts.