The world’s supply of oil is returning — slowly — to balance. In the first half of 2019, supply exceeded demand by 900,000 barrels a day, but the second-quarter excess was just 500,000 barrels a day. By the end of the first quarter of next year, global stockpiles will have increased by 136 million barrels.
The important detail is that the recent agreement between OPEC and its partners, aka OPEC+, has failed to achieve its goal of rebalancing the market for crude and will continue failing into next year. OPEC itself is expected to continue producing about 30 million barrels a day through the remainder of this year. In 2020, demand for OPEC crude could drop to 28 million barrels a day, a production level last seen in 2003.
The International Energy Agency (IEA) reported the data Friday in its July Oil Market Report. The agency stuck with its estimate of demand growth for 2019 of 1.2 million barrels a day. That estimate has not changed in three months.
Next year, the agency is predicting demand growth of 1.4 million barrels a day. That may sound like an improvement but in reality is 450,000 barrels a day below previous estimates. There are “many reasons” for the lowered estimate: “European demand is sluggish; growth in India vanished in April and May due to a slowdown in LPG deliveries and weakness in the aviation sector; and in the US demand for both gasoline and diesel in the first half of 2019 is lower year-on-year.”
The recent agreement between Saudi Arabia and Russia to restrict production through the first quarter of next year will have one major effect on the world oil market: OPEC will continue to bleed market share. Or, as the IEA puts it: “Clearly, this presents a major challenge to those who have taken on the task of market management.”
Recent price increases reflect events like the attacks on oil shipments out of the Persian Gulf and the shut-in of Gulf of Mexico platforms ahead of Hurricane Barry that do lift prices, but only temporarily. The longer range outlook for the global economy is weak, and a slowly growing world economy does not need as much oil. By reducing production, OPEC is shooting itself in the foot — or worse.
If we look out beyond the next year or two, the picture gets even cloudier for oil producers. Demand for oil and refined products is forecast to decline as more electric vehicles hit the world’s highways. Researchers at BloombergNEF in May forecast electric vehicle sales to rise from a record 1.1 million worldwide last year to 11 million in 2025, and then surge to 30 million in 2030 as EVs establish cost advantage over internal combustion engine (ICE) cars.
For now, though, the IEA sums up the world oil market this way: “Market tightness is not an issue for the time being and any re-balancing seems to have moved further into the future.” In other words, there’s plenty of oil and there will continue to be plenty of oil well into next year.
West Texas Intermediate (WTI) crude oil traded at around $60.30 a barrel Friday morning, up less than a dime for the day. Brent crude traded at around $66.70 a barrel, about 20 cents above Thursday’s settlement price.