A stark warning from the International Energy Agency (IEA) indicates that the surge in oil production in the US will lead to a significant glut in global markets much sooner than OPEC and its allies, like Russia, anticipate.
The IEA states that the continuing rise in US output, expected to surpass the current 13.1 million barrels per day, could result in an 8 million barrels per day oversupply by 2030. This is driven by an anticipated doubling in output from Guyana to 1.3 million to 1.5 million barrels per day and increased production from some OPEC members.
In its latest medium-term market report, titled "Oil 2024," the IEA noted that oil demand growth is on track to slow down before ultimately reaching its peak of nearly 106 million barrels per day by 2030, up from just over 102 million barrels per day in 2023.
At the same time, the IEA expects total oil production capacity to rise to nearly 114 million barrels per day by 2030, well above projected global demand.
This poses dangers for the US industry, especially its shale oil sector, which will face even greater pressures on costs and revenues. The sector is currently extracting more oil from fewer rigs than it has in years, but these cost reductions and improved productivity have limits, and that’s what the IEA is warning about.
The IEA stated that the dynamics of oversupply have "significant consequences" for oil markets, including for the US shale industry and producer economies in OPEC and beyond.
“As the pandemic rebound loses steam, clean energy transitions advance, and the structure of China’s economy shifts, growth in global oil demand is slowing down and set to reach its peak by 2030,” said IEA Executive Director Faith Birol in a statement.
“This report’s projections, based on the latest data, show a major supply surplus emerging this decade, suggesting that oil companies may want to make sure their business strategies and plans are prepared for the changes taking place,” he added.
Despite the projected slowdown in oil demand growth, the IEA noted that in the absence of stronger policy measures or behavioral changes, crude demand is still expected to be around 3.2 million barrels per day higher by 2030 than in 2023.
This growth is largely driven by robust demand from fast-growing economies in Asia, as well as the airline and petrochemical sectors. In advanced economies, the IEA says oil demand is on course to dip below 43 million barrels per day by 2030, down from close to 46 million barrels per day last year.
Aside from the coronavirus pandemic, the last time oil demand from advanced economies was that low was in 1991.
In an effort to slow the forecasted move away from oil, Saudi Arabia and the rest of OPEC+ agreed in early June to extend some production cuts to the end of 2025. They also plan to allow a smaller amount of barrels to be gradually reintroduced to the market through most of 2025.
OPEC+ agreed to extend a total of 5.86 million barrels per day (bpd) of output reductions. Within that broader figure, the exporter group decided to extend 3.66 million bpd of cuts that were due to expire at the end of June 2024 until the end of next year.
Those output restrictions amount to more than half of the 2030 oversupply estimate from the IEA, demonstrating how finely balanced the global oil market will be for the next half-decade or more. This casts doubt on the idea that OPEC+ will be able to reintroduce 2.2 million barrels per day of production cuts after they expire at the end of September.
Additional voluntary reductions of 2.2 million bpd by eight members, including leading exporters Saudi Arabia and Russia, were prolonged by three months to the end of September and will then be phased out through early 2025 if demand increases by OPEC’s estimate of 2.25 million barrels per day.
However, the slide in oil prices since the deal was announced on June 2 suggests a lack of confidence in the market regarding the strengthening of demand over the rest of this year.
