US Will Be World's Largest Oil Producer By 2023, But There Is A Catch

Last month, the US accomplished a historic achievement: thanks to soaring shale production, America surpassed Saudi Arabia as the world's second largest oil producer, pumping over 10 million barrels per day, while Saudi Arabia remains stuck just below the key mark as a result of the ongoing self-imposed production limit, meant to push the price of oil higher (a boon to US shale producers) and to reduce the global inventory overhang. Meanwhile, the world's top producer, Russia, remains safely in first place, with a daily output of roughly 11 million bpd.

That, however, is set to change however in the coming years according to the International Energy Agency, which in its highly anticipated Oil 2018 report released overnight predicted that the U.S. will overtake Russia to become the world’s largest oil producer by 2023, accounting for most of the global growth in petroleum supplies.

The IEA now expects the US to reach a record of 12.1 million barrels a day in 2023, up about 2 million barrels a day from this year, in the process surging past Russia. Furthermore, the IEA predicted that of the 6.4 million new barrels of oil that will be pumped every day between now and 2023, almost 60% will come from the U.S., the IEA said.

While Saudi Arabia’s crude-output capacity is also expected to gros substantially, and reach 12.3 million barrels a day in 2023 - meaning it could rival the U.S. for the top spot as a producer - the Saudis have historically pumped well below their capacity to maintain their importance as a so-called swing supplier that could increase or decrease output as the market needs.

Meanwhile, counting all liquids, including those derived from natural gas, U.S. production will rise to nearly 17 million barrels a day over the next five years from about 13 million today, the IEA predicted, far more than Saudi Arabia or Russia.

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As the WSJ reports, the IEA’s closely watched five-year forecast showed the U.S. hitting new strides in its oil and gas boom, "helped by technological advances, improved efficiency and a fragile recovery in oil prices that is encouraging shale companies to ramp up their drilling."

This is a sea-change for the US, which was once heavily dependent on imports from the Middle East, and is now getting closer to achieving its goal of producing enough crude to meet domestic demand for refined products like gasoline.

In other words, becoming "energy independent." In doing so, American influence on global oil markets will also rise, with U.S. oil exports more than doubling to 4.9 million barrels a day by 2023, according to the IEA. Until 2015, the U.S. didn’t export any crude oil by law, but in five years it is expected to be among the world’s biggest exporters.

In addition to the US, the IEA expects oil production to grow in Canada, Brazil and Norway—all non-OPEC members. Together with the U.S., those three countries will add enough barrels to meet growing consumption to the end of the decade, the IEA said, which of course assumes there is no sharp drop in oil demand, i.e. a global recession.

Consumption of oil will remain robust, shrinking the gap between demand for crude and producers’ capacity to pump it to the lowest level since 2007—when oil prices were on a run toward record levels over $140 a barrel.

That may be a tall order for a world where even the skeptics admit the US is headed for a recession in 1,2 years.

In this context, the IEA sees little sign that oil demand will peak in the next five years, weighing in on a debate over whether efforts to curb the impact of climate change could eventually limit global oil consumption. Oil demand is expected to go above 100 million barrels a day for the first time next year, rising by a total of 6.9 million barrels a day to 104.7 million barrels a day by 2023.

Recession or not, the IEA predicts that within OPEC, only the Middle East is expected to see any increase in output, as other members like Venezuela struggle with internal problems.

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There is, however, a potential catch as the US sets off on the path to global oil production dominance. The IEA warned that US companies will need to start spending again to avoid the potential for crude-oil shortages that could cause prices to surge.

Specifically, unless sufficient pipeline capacity is built out of oil-producing regions including West Texas, U.S. Midwest and Western Canada, the "increase in production we foresee could be at risk, with serious implications for global markets," the IEA says in Oil 2018 market report released Monday.

Regionally, the IEA warns that West Texas and Western Canada will face midstream capacity shortages in 2018 and 2019 amid rapid production increase. it adds that while the anticipated surge of output has generated a “flurry of investment,” construction may not keep pace with rising production.

Looking at West Texas, IEA determines that it had 160k b/d of line space available at end-2017, will be in deficit 2H 2018; The deficit of 180k b/d in 3Q and 260k b/d in 4Q may reach 290k b/d in 1H 2019, and thus the key question is whether 550k b/d EPIC line will be running in 2019 as planned. The resulting pipeline shortage could pressure WTI in Midland vs Cushing and Houston

The bottom line is that limited U.S. export capacity could hinder oil shipments abroad, although for now the IEA expects that export capacity will reach 2.5m b/d by end of 2018, 4.7m b/d in 2020, and a whopping 4.9m b/d in 2023.

In other words, unless energy companies start spending much more aggressively on CapEx (which means reducing stock buybacks), US production may be organically capped, in which case - assuming the IEA's demand forecast is accurate - energy prices may surge in the coming years as the world finds itself in a structural deficit.

Obviously, the worst possible outcome would be a surge in prices just as growth sputters, unleashing the worst stagflationary episode since the summer of 2008 when oil briefly touch the mid-100 level. Everyone remembers what followed.