IEA maintains oil glut projection for 2020 as prices steady at $65

Despite the OPEC+ cuts, the oil market is still facing a supply surplus in 2020, according to a new report from the International Energy Agency (IEA).

According to the IEA, its demand outlook remains unchanged, as there could still be a surplus of 0.7 mb/d in the market in the first quarter of 2020, even if all the countries comply with their new allocations and Saudi Arabia delivers the rest of its voluntary cut of 0.4 mb/d.

Though oil prices have remained stable at $65 per barrel since the last OPEC meeting, there are worries for oil producers if a glut happens. For instance, Nigeria in its proposed 2020 budget, estimated oil sales to stand at 2.18 million bpd at a price of $57 per barrel, while the exchange rate is expected to remain N305 per dollar.

OPEC+ announced additional cuts of 500,000 bpd, even though the group is already producing under its limit. In November, for instance, OPEC was producing 440,000 bpd below the agreed upon ceiling.Saudi Arabia agreed to shoulder an additional 400,000 bpd of voluntary cuts. But the deal also exempts 1.5 million barrels per day (mb/d) of Russia’s condensate production, allowing Russia to actually increase condensate output by 0.8 mb/d.

Still, the deal should take supply off the market. “If all the countries comply with their new allocations and Saudi Arabia delivers the rest of its voluntary cut of 0.4 mb/d, the fall in production volume versus today will be about 0.5 mb/d,” the IEA said.OPEC said in its own report that the oil market would be largely in balance in 2020, albeit with a temporary glut in the early part of the year. The IEA sees inventories building at a rate of 0.7 mb/d in the first quarter.

The IEA cut its forecast for non-OPEC supply growth from 2.3 mb/d to 2.1 mb/d, due to weaker growth from Brazil, Ghana and the United States. The U.S. typically gets all of the attention, but disappointing news from Brazil and Ghana also led the IEA to revise forecasts lower.

But even the combined effect of slower non-OPEC production growth and the OPEC+ cuts is not enough to erase the glut entirely. “With our demand outlook unchanged, there could still be a surplus of 0.7 mb/d in the market in 1Q20,” the IEA said.

“Even if they adhere strictly to the cut, there is still likely to be a strong build in inventories during the first half of next year,” the IEA warned. But the forecasted glut largely depends on ongoing production growth from U.S. shale drillers. The IEA admits that there will be a slowdown, but is still optimistic on production growth, with gains of 1.1 mb/d in 2020, compared to 1.6 mb/d this year.

The agency has consistently been at the optimistic end of the spectrum regarding shale growth, even as major investment banks long ago slashed their forecasts. The IEA cut its U.S. supply forecast by 110,000 bpd from last month’s report, but at 1.1 mb/d, its figure still seems generous. The IEA is betting that the oil majors, who are less responsive to lower prices and problems with cash flow, will continue to scale up drilling.

Meanwhile, a new report from IHS Markit highlights the accelerating rate of decline among the U.S. shale complex, a decline rate that grows in tandem with production increases. “Oil and gas operators in the Permian Basin, the most prolific hydrocarbon resource basin in North America, will have to drill substantially more wells just to maintain current production levels and even more to grow production, owing to the high level of recent growth,” IHS said in a statement. The base decline rate in the Permian has “increased dramatically” since 2010.

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