May 2018

OPEC and shale shaping global oil market dynamics

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In a scenario with OPEC cuts expiring at the end of 2018, and shale/tight oil contributions continuing to grow, we expect global liquids supply to increase to 101.1 million bbl/d next year, and further to nearly 110 million bbl/d by 2025. Should the cuts be extended into 2019, global oil supply will be reduced by 800 thousand bbl/d next year.

Figure 1 shows the oil (crude and condensate) production from the OPEC countries, Russia, and shale/tight oil, as well as the total global oil and liquids supply, from 2010 to 2025. OPEC countries are grouped into the Persian Gulf (Saudi Arabia, Iran, Iraq, Kuwait, UAE and Qatar), Libya and Nigeria, as well as other member countries, whose production contribution is declining (Venezuela, Angola, Algeria, Ecuador, Gabon and Equatorial Guinea). Last year, oil production from the OPEC countries stood at 35.8 million bbl/d, while Russia produced 10.96 million bbl/d, and 5.6 million bbl/d came from shale/tight oil. This year, given the extended OPEC cut agreement, OPEC and Russia combined are expected to produce 46.6 million bbl/d of oil, flat year-over-year. Shale oil production, on the other hand, is expected to grow to 7.1 million bbl/d this year, and reach 9.9 million bbl/d by 2020.

Figure 2 shows year-on-year growth in quarterly oil supply for the OPEC region, Russia, and NA shale during 2018-2019, provided that the current cut agreement with OPEC ends in December 2018. In addition, two global oil production scenarios are depicted on the chart that highlight how total oil supply next year can change if the agreement with OPEC is prolonged. During 2018, OPEC production is expected to trend below the set target of 33.42 million bbl/d and average 32.67 million bbl/d. Persian Gulf produced at an average rate of 24.7 million bbl/d so far in the year and we anticipate production to increase seasonally above the target of 24.9 million bbl/d from June 2018. Recovering from attacks and associated supply outages, Libya and Nigeria are estimated to increase output by 450 thousand bbl/d on average in 1H 2018 and produce at a rate of ~2.85 million bbl/d for the remainder of the year. On the other hand, continuing declines in other OPEC countries are estimated to remove 516 thousand bbl/d on average this year and thus significantly contribute to overall compliance in the region. Assuming that the cut agreement will not be prolonged next year, Rystad Energy forecasts an increase in production from both OPEC and Russia. By Q4 2019, Persian Gulf countries are estimated to add 700 thousand bbl/d, Russia is likely to return to the pre-cut levels, growing supply by 300 thousand bbl/d, and Libya and Nigeria can potentially bring additional 200 thousand bbl/d into the market. Adjusting for OPEC members that will continue to decline in 2019, we see nearly 900 thousand bbl/d of additional volumes flowing into the market by the end of 2019.  At the same time, North American shale and tight oil production is expected to increase by ~1.5 million bbl/d during 2018 and keep a similar growth in 2019. As a result, total global oil production is forecasted to reach an average of 86 million bbl/d next year. However, if the OPEC agreement is prolonged into 2019 and all current participants agree to maintain supply targets, oil production next year is forecasted to average around 85.2 million bbl/d. Thus, we would see an 800 thousand bbl/d lower supply compared to the standard case scenario.

Figure 3 shows the total spending from OPEC and shale/tight oil from 2010 to 2021. Total expenditures (capital, exploration and operating) have been continuously increasing since 2010  until 2015, when spending started to decrease, falling by 12% in 2016 for OPEC countries, and 31% for the shale/tight oil supply segment. Investments (Capex) in shale took an even greater hit, falling 44% in 2016. Last year, however, saw a turning point for global investments, and shale in particular showed a remarkable activity recovery, reflected in double-digit growth in investments. The capital expenditures from the OPEC countries, on the other hand, are expected to stay flat until 2019. Post 2019, growth in investments is expected to be led by Iran, Iraq, Venezuela, Qatar and Nigeria. In Iran, the second phase of Azadegan is expected to be sanctioned in Q1 2019. Similarly, Shell and Eni are expected to reach an FID on Bonga Southwest and Zabazaba (Nigeria) early next year. Qatar’s North field A (phase 1) is planned for sanctioning in 2020, and the second phase of the Junin-6 development in Venezuela is expected to be approved in 2023. Investments in shale will continue to increase over the next three years, with the Permian Tight Oil plays, Eagle Ford Shale and Utica Shale leading the growth trend.

Shale and tight oil production in North America has played a vital role in global oil dynamics, contributing to the market oversupply. Looking forward, we expect this supply segment to drive growth in the oil output globally. With around 7.1 million bbl/d of oil production estimated to flow into the market in 2018, the volumes are likely to double by 2025. On the other hand, the OPEC region is forecasted to grow oil production by only 2.5 million bbl/d during the same time period, particularly driven by Iran and Iraq. The OPEC decision to continue to balance the market through individual country output cut targets can prove vital for output balancing in the medium and potentially long term.