LONDON — As OPEC and its allies meet in Abu Dhabi, the IEA said it faces a significant challenge in managing the market into 2020.
Demand for the group’s crude in the first half of 2020 will be 1.4 MMbpd below its August output as production surges from their competitors, including the U.S. Though an increase in stockpiles has taken a pause for now, growth in other countries, including Brazil and Norway means that 2020 could see a significant increase in oil stockpiles and pressure on prices. As an illustration of the challenge OPEC is facing, the U.S. briefly overtook Saudi Arabia as the world’s largest oil exporter in June.
A committee of OPEC+ members is meeting in Abu Dhabi on Thursday to discuss compliance with output cuts that are due to expire in March. Though Russia said earlier this week that deeper cuts are currently off the agenda, the International Energy Agency’s balances suggest the group’s current production levels won’t be enough to prevent a return to inventory builds next year.
Bumper Growth
“The challenge of market management remains a daunting one well into 2020,” the agency said in its monthly report. “Soon, the OPEC+ producers will once again see surging non-OPEC oil production with the implied market balance returning to a significant surplus and placing pressure on prices.”
Supply from outside the Organization of Petroleum Exporting Countries will grow by 1.3 MMbpd in the second half of the year, after an “enormous production surge” over the same period last year. That will be followed by a 2.3 MMbpd increase in 2020.
“While the relentless stock builds we have seen since early 2018 have halted, this is temporary,” the IEA said.
Much of the growth continues to come from the expansion of U.S. output, but there are several projects elsewhere also boosting the figure. Norway’s giant Johan Sverdrup field will come online before the end of the year and produce 440,000 bpd by the middle of 2020, while seven new production units have started in Brazil since the end of last year, the IEA said.
The agency retained its oil demand growth forecast of 1.1 MMbpd this year as the market continues to be whipsawed by the trade war between the U.S. and China. Consumption increased by just 200,000 bpd in June, meaning world oil demand growth averaged 450,000 bpd in the first half.
Those figures should rebound to 2 MMbpd in the fourth quarter, driven in part by lower prices. For that to happen though, there needs to be no further deterioration in the economic climate or trade disputes, the agency said.
As demand has wavered, competition for market share both within and outside of OPEC has heated up. While Saudi Arabia has slashed production well below its quota under the output-cut agreement, not all producers have been as compliant. Russia, Iraq and Nigeria pumped 600,000 bpd more than their allocations.
*Alex Longley – Bloomberg
