OPEC will have an uphill battle if it wants to keep oil markets balanced next year as a potentially tighter oil market in the second half of 2019 starts to wash away on a wave of non-OPEC supply. The International Energy Agency’s June Oil Market Report predicts a surge in US shale next year along with strong crude oil contributions from Canada, Brazil, and Norway. This translates to non-OPEC supply growth accelerating from 1.9 million b/d this year to 2.3 million b/d in 2020.
“A clear message from our first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2 million b/d of spare capacity,” the IEA said. Indeed, the IEA has called on OPEC crude to drop to 29.3 million b/d in 2020, 650,000 b/d below the May output level. OPEC’s May supply fell to its lowest since 2014 as Iranian supply plunged to 2.4 million b/d due to sanctions — a number not seen since the late-1980s and on lower Saudi Arabian as well as Nigerian output.
This is despite a stronger oil demand growth outlook of 1.4 million b/d next year, according to the Paris-based agency, supported by solid non-OECD demand and petrochemicals expansion.
There are a number of petrochemical projects due to start up in 2020, including in the US, China, South Korea and Thailand. The IEA highlighted that “if they come on stream as scheduled, LPG and ethane demand could increase by a combined 395,000 b/d and naphtha demand by 110,000 b/d by the end of 2020.” However, in the more immediate term, OPEC, Russia and its allies, which still have yet to decide on a date to meet, must decide whether to roll over the 1.2 million b/d in cuts and the IEA report offers mixed clues.
On the one hand, oil demand growth for 2019 has been downgraded for the second month in a row and the IEA notes that “world trade growth has fallen back to its slowest pace since the financial crisis ten years ago”. But on the other, it states that “there is optimism that the latter part of this year and next year will see an improved economic picture… assuming that trade disputes are resolved and confidence rebuilds”.
The IEA signaled to OPEC oil ministers that OECD oil stocks remain at comfortable levels of around 16 million barrels above the five-year average.