Last week, the International Energy Agency made a lot of OPEC brows furrow when it warned that 2018 may not be a very happy new year for the cartel.
U.S. shale supply, the IEA said in its December Oil Market Report, is set to grow more than OPEC has estimated and this could be the undoing of the production cut that boosted prices this year.
OPEC, for its part, has insisted that U.S. shale production won’t grow as much as the IEA says, baffling some observers who now wonder who they should believe. But let’s put it another way: If the coach of a football team tells you that his team will win the cup because they’re the best, but the football association has estimated that the team is not the best one in the league, who would you believe?
OPEC has a history of underestimating U.S. shale. This underestimation led to the glut that sank prices in 2014. Now it stands to reason that the cartel is more cautious in its estimates of U.S shale oil developments, but this caution does not necessarily have to be reflected in comments. Let’s not forget that comments from OPEC officials—whether or not grounded in facts—have had a direct and immediate effect on prices from events such as the shutdown of the Forties pipeline network last week.
So, it would make sense to lean more towards what the IEA says, and it says that non-OPEC supply next year will probably rise by 1.6 million bpd—a 200,000 bpd upward revision on the previous OMR. U.S. shale production alone will, according to IEA’s latest estimate, grow by 870,000 bpd in 2018. Meanwhile, demand will rise by 1.3 million barrels daily next year, hinting at another glut in the making.
Now, OPEC’s last forecast is that non-OPEC supply next year will rise by just 990,000 bpd next year to 58.81 million bpd, although the group does caution that any non-OPEC supply growth forecast involves considerable uncertainties regarding U.S. shale production growth. For the U.S. specifically, OPEC forecasts a 1.05-million-barrel daily supply growth next year, which will be partially offset by declines in producers such as Russia, China, and Mexico, among others.
That’s quite a discrepancy between IEA and OPEC figures, but it’s not the only one. The two more notably disagree on when the glut will be over. IEA is skeptical about it disappearing before the end of next year, while OPEC is upbeat, believing the market will return to balance in the second half of 2018 as demand growth accelerates.
Sometimes OPEC’s forecasts sound like developments that the cartel can will into existence, and this market rebalancing forecast is one of these cases. It’s true that some OPEC members have been very diligent in their compliance to the lower production quotas. Others not so much, so those from the first group have actually cut more than they agreed to in order to compensate for the non-compliant ones.
Can the overachievers continue doing this to ensure the forecast materializes? They can, but they can’t do anything about U.S. shale, and it’s uncertain whether Russia will stay in the agreement after the end of June: Moscow has indicated it would rather quit as soon as politely possible. OPEC also has another problem that’s been there since the original deal, but recently has been garnering more attention. With oil prices higher, how long until one or more OPEC members decide to drop the deal and cash in on the price increase?