Does OPEC See U.S. Oil Output as Half Full or Half Empty?
Ahead of their meeting in Vienna later this week, OPEC’s oil ministers have done a good job of convincing themselves that they can simply decide to hold steady, and do no more than they’re already doing. That’s not surprising given they tend to err on the side of doing as little as possible because that’s often the easiest consensus to form among the group’s members.
What’s interesting is how they will come to that conclusion, given the wealth of data out there and the myriad ways of slicing and dicing it. One reason for their complacency is that they expect “sharp revisions of non-OPEC supply going into 2020, particularly from shale basins in the U.S.,” according toOPEC Secretary-General Mohammad Barkindo. My gut feeling is that OPEC should beware. Yes, the breakneck growth in U.S. oil production is slowing, but that doesn’t mean that there is going to be a sudden downward revision to oil production forecasts for 2020.
America’s second shale boom is certainly drawing to a close. The Energy Information Administration is now forecasting that output will plateau in 2020, but that is very different to saying that the average level of production next year will be little higher than this year. And confusing the two is where OPEC may come unstuck.
There are a lot of forecasts of U.S. production out there and depending which way you look at it you can arrive at very different views of what growth is. An important distinction needs to be made between those forecasts that compare the average level of production next year to the average level in 2019 and those that compare the production level at the end of 2020 with that at the beginning.
It is perfectly possible to have a year-on-year growth forecast of about 1 million barrels a day and a December 2019-to-December 2020 forecast of less than 300,000 barrels a day. Just look at the chart below, where the data for U.S. oil production are drawn from the latest Short-Term Energy Outlook.
The difference arises because the output growth in 2019 has been so steep — rising from 12.04 million barrels a day in December 2018 to a projected 13.11 million in December 2019. With most of the growth taking place in the last five months of the year, the average rate of production in 2019 is expected to be 12.29 million barrels a day.
By contrast, the 2020 output profile is much flatter, with output rising from 13.11 million barrels a day to just 13.4 million barrels by the end of the year for an annual average level of 13.29 million barrels a day.
The year-on-year growth remains strong even though the day-to-day growth has almost stopped.
OPEC’s view is starkly different. They peg U.S. output at 12.04 million barrels a day in December 2018 — the same as the EIA — but their forecast is for just 12.71 million barrels a day in December 2019. They then see output continuing its steady climb throughout 2020 to reach 13.72 million barrels a day by the end of the year. That’s a higher number than the EIA has ever forecast for December 2020, even when it was at its most optimistic back in July.
Then there are the very pessimistic views of Mark Papa and Scott Sheffield, respectively the CEOs of shale-focused Centennial Resource Development Inc. and Pioneer Natural Resources Co., who see very low rates of average year-on-year output growth.
If the EIA is right about current production levels, then getting average year-on-year growth in 2020 down to the 400,000 barrels a day seen by Papa is going to require a steep drop in U.S. production over the course of next year, never mind a slowdown in growth. Assuming the EIA has got its forecasts for the Gulf of Mexico and Alaska right, then onshore production — dominated by shale — would have to fall by more than 600,000 barrels a day by the end of 2020.
Turning in results like that could well spell the end for several of the independent shale producers.
If Papa and Sheffield are right, and they are certainly closer to the wellhead than I am, then either the EIA is over-estimating the current level of U.S. production, or the oil market is in for a big shock next year. And in that case, OPEC will look downright prophetic if it decides to do nothing.