Even as the Organization of Petroleum Exporting Countries (OPEC) deepens its supply cuts through first-quarter 2020, the world remains awash in crude oil. In addition to the continued growth of US production, non-OPEC countries such as Brazil, Canada, Norway, and Guyana all expect output to climb.
The US Energy Information Administration (EIA) expects US crude oil production to average 13.2 million b/d in 2020, up 900,000 b/d from 2019’s record output. EIA also predicted record output from seven major US shale formations in January 2020, a roughly 29,000 b/d rise pushing production to 9.14 million b/d.
But the rate of US production growth is slowing on both annual and nearer-term bases. Expected 2020 growth is slower than either 2018 (1.6 million b/d) or 2019 (1.3 million b/d) and it’s not because the oil is running out. US proved reserves of both oil and natural gas reached all-time highs in 2018. China’s reserves growth also is accelerating.
The International Energy Agency (IEA) noted in its latest monthly Oil Market Report that global oil oversupply would remain in place during first-half 2020, even if the OPEC+ group adheres strictly to agreed cuts. IEA expects global production to grow by 2.1 million b/d in 2020, cuts included, compared with 1.9 million b/d in 2019.
Oversupply is even more acute in the natural gas markets. A milder-than-average start to winter has limited withdrawals from US storage even as production grows. New LNG trains continue to come online, but Asian demand is subdued, and European storage is filling rapidly. Consultants FACTS Global Energy predict some US LNG offtakers will exercise options to not lift cargoes starting in second-quarter 2020 and that US LNG producers may start shutting in production by June.
Demand
Demand for both crude oil and natural gas is rising, just not as fast as supply. And petrochemical production is emerging as a demand driver of increasing importance as markets for both transport fuel and power generation continue to evolve.
The transition from carbon-intensive generation to alternative sources is picking up pace in the US, according to DNV GL’s Energy Transition Outlook 2019. The energy transition in the US, however, is being driven by market forces and technological developments and costs, rather than federal governmental mandates, with cities and states also playing a leading role, the classification society said.
Clear the way
How can expanding supply and uneven, evolving demand best be reconciled? By allowing global markets to allocate resources. Increased supply of a good can help market liquidity, particularly when accompanied by multifaceted demand, but only to the degree markets are allowed to function.
US exports of crude to China have fallen by roughly 50% year-on-year. LNG shipments along the same route are off by more than 87%. Despite such bottlenecks, the US exported more total crude oil and petroleum products than it imported in September 2019, the first time this has happened. EIA expects US net imports to continue, averaging 570,000 b/d in 2020 compared with net imports of 490,000 b/d in 2019. The US has also exported record amounts of LNG in each of the past 3 months.
Oil and gas producers in the US and elsewhere, however, should be able to sell their output for the best price it can get, without qualification. Consumers should have the same ability on the buying side. Free and open markets allow this to happen.
The US should return to being a champion of such markets. Its unsurpassed hydrocarbon resources position it literally to fuel global economic growth. As the world’s prosperity increases, so too will that of the US. The time for a return to US leadership on economic issues, including an end to its trade war with China, is now.
