March 06, 2018

IEA Sees US Oil Output Surge Stealing OPEC Share in Next 5 Years

Stratas Advisors

Stratas Advisors’ View

OPEC has backed itself into a corner with its production agreement. In an effort to shore up short-term prices, they have lost longer-term market share, and there is little evidence that OPEC nations took this recent downturn as an opportunity to enact the kind of strong economic reforms that would reduce their oil-price vulnerability in the future.

While the general world view that the IEA has makes sense, there is one concept that we disagree with: the concept of US self-sufficiency that the IEA is currently using. Due to a fundamental chemical mismatch between the majority of US refinery capacity and the type of crude oil produced domestically, it is unlikely the US will ever become entirely self-sufficient as long as oil markets remain open and arbitrages allow for the profitable import and export of the most optimal grades of crude oil for all parties.

This is an important point that is often overlooked by policymakers outside of the industry; therefore, it must be continually reiterated and explained within the industry to ensure that logical energy security policies are implemented. 


US shale oil output is set to surge over the next five years, stealing market share from OPEC producers and moving the United States, once the world's top oil importer, closer to self-sufficiency, the International Energy Agency said on March 5.

A landmark deal in 2017 between OPEC and rivals, including Russia, to curb output to reduce global oversupply materially improved the outlook for other producers as prices rose sharply throughout the year, the IEA said in Oil 2018, an annual report looking at the next five years. With US supply surging, OPEC will see demand for its crude falling below current production in 2019 and 2020, the report forecasts, suggesting a return to oversupply if OPEC output keeps steady.

US oil output has resumed sharp growth during the past year and is expected to rise by 2.7 million barrels per day (bpd) to 12.1 million bpd by 2023, as growth from shale fields more than offsets declines in conventional supply.

"The United States is set to put its stamp on global oil markets for the next five years," said Fatih Birol, the IEA's executive director, in a statement.

Natural gas liquids will add another 1 million bpd to US supply to reach 4.7 million bpd by 2023.

With total US liquids production set to reach nearly 17 million bpd in 2023, up from 13.2 million in 2017, the United States will by far be the world's top oil liquids producer.

Oil production growth from the United States, Brazil, Canada and Norway will more than meet global oil demand growth through 2020, the IEA said, adding that more investment would be needed to boost output after that.

Non-OPEC production is set to rise by 5.2 million bpd by 2023 to 63.3 million bpd with the United States alone accounting for nearly 60% of global supply growth.

Growth will be led by the Permian Basin in Texas and New Mexico, where output is expected to double by 2023.

"Despite talk of capital discipline and increased focus on returns rather than growth, US producers regrouped quickly when oil prices stabilized and began to rise," the IEA said.

Production in 2017 rose by 670,000 bpd as drillers added 200 rigs "beating all expectations," the IEA said.

Last year, the IEA forecast that US shale production would grow by 1.4 million bpd by 2022, with oil prices of up to $60 a barrel and by up to 3 million barrels with oil at $80 a barrel.

By contrast, output from OPEC producers will grow at a much slower pace, the IEA said, adding it expected Venezuelan production declines to accelerate offsetting gains in Iraq.

As a result, OPEC's crude oil capacity will grow by just 750,000 bpd by 2023.

With shale and other non-OPEC supply rising, demand for OPEC crude plus withdrawals from inventories will average 31.80 million bpd in 2019, the IEA said, 1.80 million bpd less than its last medium-term forecast.

Despite steep non-OPEC oil production gains, the IEA warned that a decline in mature fields meant more investment was needed across the globe after 2020.

"Upstream investment shows little sign of recovering from its plunge in 2015-2016, which raises concerns about whether adequate supply will be available to offset natural field declines and meet robust demand growth after 2020," it said. - Reuters

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