The Energy Information Administration (EIA) published its Short-Term Energy Outlook (STEO) for January, and for the first time provided its projections for 2018. After all of the hype about the OPEC production cut, it may come as a surprise that the EIA is projecting a rise in global oil inventories in 2017 and 2018.
Specifically, the EIA had estimated that OECD oil stocks ended at 3.101 billion barrels at the end of 2016. It's forecasting them to rise further to 3.127 and 3.158 billion at the end of 2017 and 2018, respectively. The 5-year ending average as of December 2014, before the glut started, was 2.666 billion.
Supply and Demand
To understand the basis for the builds, a more detailed look at expected supply and demand trends is required. The EIA expects non-OPEC production to rise by 0.7% and 1.2% in 2017 and 2018, respectively. The gains come largely from the U.S. and Canada. U.S. output is forecast to rise 2.1% and 4.6% in 2017 and 2018. Canadian output is forecast to grow by 4.3% and 3.3% in 2017 and 2018.
The rise in U.S. output is largely expected from the Gulf of Mexico. The EIA has yet to forecast much of a supply response from American shale oil. But I think we may have already seen the start of a response. The EIA reported the production from the “Lower-48” (excluding Alaska and the Gulf of Mexico (offshore) rose by over 100,000 b/d in October. (The more accurate, survey data of production lags by a few months.) This was the first meaningful rise in this data since production had peaked.
The rise was mainly due to an increase of 72,000 b/d in North Dakota. Continental Resources (CLR) is the largest producer in the Bakken basin and reported to investors that it had added two crews to complete “Drilled But Uncompleted” wells (DUCs). It also said that it would be doubling its completion crews by end-2016. Furthermore, it said it had built-up its DUCs inventory to 195 wells, and that did not include 15 well that had been completed and would start pumping in 2017. This is concrete evidence that American shale production is responding to higher crude prices.
The EIA is assuming OPEC crude production will average 33.2 million barrels per day (mmbd) in 2017 and 33.7 mmbd in 2018. OPEC had announced a production ceiling of 32.5 mmbd at end November for the first 6 months of 2017. But it excluded Libya, Nigeria and Indonesia from any cap. Libya has increased its output to 700,000 b/d from 300,000 b/d in September, as it attempts to restore its oil industry. Libya has said it expects to reach 900,000 b/d in a few months and 1.1 mmbd by year-end. Nigeria’s production of about 1.5 mmbd in December is targeted to increase to 2.2 mmbd by end-2017.
But production in these areas is highly uncertain due to their political issues. EIA’s estimate for 2017 would require OPEC discipline in the face of rising production elsewhere. The estimate for 2018 is around OPEC’s actual production in November- December 2016, and would require more cutbacks if the combined production increases in the U.S., Canada, Libya and Nigeria are large.
On the demand front, EIA is projecting world consumption to rise by 1.6 mmbd (1.7%) in 2017 and 1.5 mmbd (1.6%) in 2018. That reflects slowing growth in China 2.8% (2017) and 2.5% (2018), as well as “other Asia,” primarily India, of 3.6% (2017) and 3.4% (2018). Those figures appear reasonable.
But the EIA expects demand in the largest market in the world, the U.S., to 1.3% (2017) and 1.9% (2018). Those gains appear to be highly optimistic. Year-over-year increases for the first 10 months of 2016 (for which hard data exists) showed a gain of just 0.1%.
OPEC has managed to get the market excited about its production cuts. But a more detailed analysis shows that the oil glut may still grow through 2018. There are many uncertainties on the supply side, but the vast majority of them are unsupportive for oil prices.
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INO.com Contributor - Energies
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.