Comments: Market Remains Out of Balance

Abstract

Editor's column Five years since the start of the precipitous oil price drop that led to the industry’s worst recession since the 1980s, the oil market is still struggling with supply/demand balances and price stability. Recent oil market forecasts reach essentially the same conclusion: the market will remain oversupplied into 2020, weighing on prices for the short term. In early July, OPEC and other major producers decided to extend production cuts into 2020 in an attempt to keep oil prices steady as global demand growth appeared to be slowing and US unconventionals output continued to rise. Global oil demand is predicted to increase by more than 1 million B/D this year, but that is lower than OPEC and the International Energy Agency (IEA) had forecast at the beginning of this year. OPEC, Russia, and other producers agreed to cut overall output by 1.2 million B/D in January and met in July to reassess the market. Even with the supply cuts, oil prices have dropped since hitting a high of $75/bbl for Brent in April. Slower world economic growth and the US-China trade dispute have undercut prices along with the rise in US production. The 11 OPEC members that are participating in the deal actually exceeded their required cuts, reaching 143% of compliance in May, according to the Reuters news agency. The producers’ group formed after oil prices began to fall sharply in the summer of 2014, from over $100/bbl to eventually under $30/bbl because of a supply glut caused primarily from a huge increase in US unconventionals output. In the first half of this year, world supply exceeded demand by 900,000 B/D, according to the IEA, which means OPEC may need to lower its cumulative production to its lowest level in 17 years next year to keep markets balanced. “Clearly, market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future,” the IEA said in its monthly report issued in July. Global oil demand growth in the first quarter of this year was the slowest since 2011 and rose less than expected in the second quarter, according to the IEA. In addition, non-OPEC production, led by US shale, continued to expand. The task by producers trying to keep the market in balance will be even tougher next year. The IEA lowered its forecast for 2020 and increased its projections for non-OPEC output. That means the oil needed from OPEC will again decline, to well below its current output rate. About 29.1 million B/D will be required from OPEC next year, compared with output of 29.9•million B/D currently. OPEC production is already running below normal given the voluntary cutbacks and the crisis in Venezuela. “The picture will evolve as 2019 progresses but in the near term the main focus remains (world) demand growth,” the IEA said. The US Energy Information Administration lowered its oil demand growth forecast to 1.1 million B/D in its latest Short-Term Energy Outlook, issued in July. A year ago, it predicted global growth of 1.4 million B/D. It now predicts that US oil production will average 12.4 million B/D this year and 13.3 million B/D next year.