OPEC is having some success in heading off another oil market downturn, but over the medium-term the cartel faces much more serious risks.
“OPEC’s production growth outlook over the medium term remains clouded by ongoing sanctions, geopolitical risks, competitive non-OPEC supply, low oil prices, and demand concerns,” Bank of America Merrill Lynch wrote in a new report.
U.S. production has soared over the past half-decade, and continues to rise. Surging output from Texas shale fields has forced OPEC to back out production in order to avoid a price crash. In the years ahead, however, OPEC will continue to struggle. OPEC member-countries may not bring a huge amount of new capacity online, which could erode its position. “In our view, OPEC capacity additions during the past six years will exceed additions over the next six,” BofAML analysts wrote.
Between 2013 and 2018, OPEC members added around 7 million barrels per day (mb/d) of new capacity. Projects came online in a variety of countries, including Iraq, Iran, West Africa and the Gulf States. Iraq in particular added huge volumes of new supply, recovering after years of war. Output from Iraq has more than doubled since 2010 and recently topped 4.7 mb/d. But future Iraqi projects, which promised to dramatically ratchet up production even from today’s high levels, were put on ice in recent years after ISIS overran the country in 2014.
Over the next six years, new additions will probably be smaller and concentrated in fewer countries. Bank of America Merrill Lynch only sees 4 mb/d of new capacity from OPEC, mostly from Iran.
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Not only will capacity growth start to slow, but OPEC production will begin to erode on an absolute basis, falling from 31.9 mb/d in 2018 to just 29 mb/d in 2024. As a result, OPEC loses market share in the global oil market.
This is not because of a lack of reserves. The oil is still there. OPEC still holds about three-quarters of total global oil reserves, with the reserves in Saudi Arabia and Venezuela vastly exceeding those in any other country. But demand is already starting to slow and growth will decelerate in the years ahead, leaving little room for new supply. U.S. shale is expected to add barrels onto the market, so OPEC will be forced to maintain supply curbs in order to prevent prices from crashing.
The projects that do move forward in OPEC countries will need to be “extremely attractive,” with an average breakeven at $25 per barrel or lower, according to Bank of America Merrill Lynch. That compares to the 80 percent of non-OPEC projects given the greenlight over the next six years with an average breakeven price at $40 per barrel.
In other words, OPEC has cheaper oil, but many OPEC members are victims of sanctions, underinvestment and other geopolitical risk. Iraq and Iran are obvious flashpoints. Iraq has suffered from violence and on-again off-again political crises, while Iran could be under U.S. sanctions for years to come.
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Then, of course, there is Venezuela, which has the largest oil reserves in the world. Regime change could bring in a new government, which would likely be friendlier to oil multinationals. But even with a new government, rebuilding the country’s decrepit oil sector would take years and tens of billions of dollars.
While BofAML predicts 4 mb/d of new OPEC capacity through 2024, roughly half of that is “technical,” which means development is uncertain and may not occur at all.
But while geopolitical events restrain supply, an even bigger threat to OPEC is the dramatic slowdown in demand expected in the years ahead. Bank of America Merrill Lynch recently predicted that the world would see peak oil demand by 2030. Demand slows significantly along the way, with growth halving by 2024 (0.6 mb/d) relative to 2019 (1.2 mb/d).
“Declining demand growth and strong non-OPEC supply growth leave little room for incremental OPEC barrels,” Bank of America Merrill Lynch warned.
By Nick Cunningham of Oilprice.com