The world is essentially oversupplied for the next 3 years, and as such, oil prices will remain low or at least won’t experience levels in the $100s as was expected in 2018.
Not even close, not even with more projected cuts.
Saudi Arabia pledges deeper cuts in February, according to OilPrice.com, quoting Saudi oil minister Khalid al-Falih.
Saudi would lower its oil production in February to just 10.1 million barrels per day, down from 10.2 mbpd this month. Riyadh’s commitments as part of the OPEC+ deal is limited at 10.33 mbpd.
“Saudi Arabia will be well below the voluntary cap that we agreed to” and will produce below its ceiling “for the full six months” of the deal, al-Falih told Bloomberg.
Not even with US oil sanctions on Venezuela.
Today ’s sanctions put roughly 500,000 bpd of Venezuelan oil exports at risk or out of commission as the US keeps undermining support for current president Maduro.
Venezuela sits atop the largest oil reserves in the world.
First, it would be a mistake to assume that natural oil reserves will be depleted any time soon. In Alaska, for instance, new technology in oil and gas exploration has led to the discovery of more than 1.5 billion barrels of crude oil in the North Slope in just two years, S&P Global Platts recently reported. New discoveries are underway and explorations by energy independents are planned.
But Bloomberg reported that we are currently in oversupply, contrary to common belief in 2016 that investments were deteriorating as prices dwindled to the low $30s and that by 2020, the world would face a shortage.
“In reality, the market today is looking at several more years of plenty, so much so that OPEC is beginning its third year of production cuts just to prevent a surplus,” said Bloomberg.
“We’re in an age of abundance,” said Ed Morse, head of commodities research at Citigroup Inc. in New York. “A supply crunch is not likely at all.”
How did we get here?
The oil price slump in 2016 reaching $30 from $120 in 2014 did force companies to slash spending in oil and gas production by about $350 billion, or more than 40% percent from 2014, according to the International Energy Agency (IEA), Bloomberg reports.
Yet supply turned out to be plentiful.
“The U.S. is estimated to produce about 12 million barrels a day of crude this year, a level it was earlier forecast to reach only in 2042. Russia has raised output to a record and Iraq’s is near unprecedented levels. Brazil is set to pump at the fastest pace in at least 15 years in 2019,” Bloomberg said.
It added that Bank of America Corp. estimates 3/4 of non-shale projects over the next five years will be profitable at just $40 oil.
These have kept benchmark Brent near $60 a barrel, despite a brief surge to a four-year high above $86 in October.
The price is right (for now)
The world still needs to add another 10 million barrels a day of production capacity by the first part of the next decade, and investment in the industry outside shale isn’t sufficient to ensure this, IEA Executive Director Fatih Birol said in Davos, Switzerland, on Jan. 22.
Consultant Rystad Energy AS projects that the U.S. will be producing more oil than Saudi Arabia and Russia combined by 2025.
Capex in shale is set to increase by 20% percent this year, the IEA said.
Low oil prices forced companies to become more efficient and reset industry costs by as much as 50% and in some case lowering break-even costs at just over $20 per barrel.
“There is no sign of a shortage so far,” Amy Mayers Jaffe, a senior fellow at the Council on Foreign Relations in New York, told Bloomberg.
“People who believe there have to be higher oil prices in the future, like OPEC or Saudi Arabia, still suggest that the supply gap is still three years away. It is continuously three years in the future.”
Oil prices today
CNBC reports that oil prices rose on Wednesday as concerns about supply disruptions following U.S. sanctions on Venezuela’s oil industry outweighed downward pressure from a darkening outlook for the global economy.
U.S. West Texas Intermediate (WTI) crude futures were at $53.43 per barrel or 0.2% above their last settlement.
International Brent crude oil futures rose 17 cents, or 0.3% to $61.49 per barrel.
Renewed concerns over Chinese growth weighed on crude prices on Monday, with WTI and Brent falling more than 3%, the largest single-day decline in a month.