OPEC sees another oil surplus next year as U.S. shale surges

A week after OPEC agreed to keep oil production restrained until early next year, the group’s first forecasts for 2020 showed it faces an even longer and tougher challenge.

The Organization of Petroleum Exporting Countries, which pumps 40 percent of the world’s oil, estimated that it’s producing about 560,000 barrels a day more than will be needed next year as the ongoing surge in U.S. shale threatens to deliver another surplus. Supplies from producers outside the cartel will grow by more than twice as much as global oil demand, it forecast.

OPEC and its partners agreed in Vienna last week to continue their output curbs into the first quarter of 2020, to balance markets against a faltering global economy and record American output. The latest outlook will present the coalition with a dilemma later this year: should they continue, and even double-down on the strategy throughout 2020, or abandon the cuts and risk a price slump.

Crude prices, trading near $67 a barrel in London, remain below the levels most OPEC nations need to cover government spending.

Global oil consumption will continue to grow in 2020 at the same pace as this year, at about 1.1 million barrels a day, or 1.1 percent, according to the report from OPEC’s Vienna-based research department. The expansion will be powered by emerging economies like India and China, but tempered by stagnant consumption in developed nations.

Supplies from outside OPEC, however, will soar by 2.4 million barrels a day, as new pipelines in the U.S. enable the country’s shale-oil explorers to press on with more drilling. The fresh tide of American oil will be supplemented by other countries such as Brazil and Norway.

As new non-OPEC supplies swamp the growth in demand, the amount of crude required from the cartel will slump sharply for a third consecutive year.

An average of 29.27 million barrels will be needed from OPEC in 2020, according to the report. That’s significantly below the 29.83 million a day its 14 members produced last month, when their output fell again as the voluntary cutbacks were compounded by crises in Iran and Venezuela.

That the organization’s production has fallen far more than intended this year, and may still prove to be too high, only illustrates the scale of its challenge. As of May, OPEC and its partners said they were cutting supply by about 700,000 barrels a day more than the 1.2 million a day pledged at the start of the year as Saudi Arabia reduced supplies more than it pledged.

With OPEC pumping in excess of levels needed next year, the organization and its partners would have to trim output further to keep markets in equilibrium. However, Saudi Arabian Energy Minister Khalid Al-Falih signaled last week in Vienna he’s reluctant to go down this path, saying that the kingdom has already cut “deep enough.”

Indeed, Thursday’s report may vindicate warnings from Al-Falih’s predecessor, Ali Al-Naimi, that production cuts by OPEC would only backfire by giving prices enough support to encourage greater investment in U.S. shale.

For now, there’s no sign the kingdom intends to reverse its current policy.

Saudi output will remain under 10 million barrels a day in August, well below the limit agreed with OPEC, according to a person familiar with Riyadh’s energy policy. At last week’s meeting, OPEC and its partners signed a charter symbolizing their willingness to manage supplies over the long term, and Al-Falih said that intervention will be necessary until American shale output goes into decline.

The organization’s latest outlook suggests he will be tested on that commitment.