Leonardo Maugeri of Harvard University, who in 2012 predicted a glut in oil supplies and a steep fall in prices, has warned that there is again a prospect that the market is heading for “a substantial fall”.
Strong growth in global supply, he argues in a new paper, is outpacing the increase in demand, in spite of the production cuts agreed by Opec and 11 non-Opec countries last year.
“It’s not too early to raise a red flag,” he writes. “Unless oil demand growth rebounds to record levels in 2017, oil prices could head for another substantial fall.”
Oil prices slumped last week and broke out of a long standing range. West Texas Intermediate crude is now trading below $49 a barrel for the first time since December.
A return to growth in the US shale oil industry, which has been bouncing back strongly after the downturn of 2014-16, is one of the principal contributors to excess supply, he adds, but there is also additional production coming on stream from multiyear developments that were approved before crude prices slumped.
Mr Maugeri described the US as “by far the main beneficiary” of the Opec-led agreement to try to stabilise oil prices.
The former head of strategy for Eni, the Italian oil group, maintains a database of 1,200 oilfields worldwide, which he says pointed to the emerging glut in 2012, and is now pointing again to the risk of oversupply.
That database indicated a rapid increase in world oil production from October last year to January this year. That put world output early in 2017 at almost 99.5m barrels per day, including crude and other related substances such as natural gas liquids, which is the standard definition used by the International Energy Agency and others, Mr Maugeri calculated.
That supply would be well ahead of demand for the first quarter of this year, which the IEA estimated last week was about 97m b/d.
Within that increase in production, there was a combined growth of almost 1m b/d from the US, Canada, Brazil, and the North Sea, a new post-Soviet record in Russia’s output, and an increase from Opec members before the agreed cuts took effect on January 1. Meanwhile world demand is expected to grow by 1.4m b/d for 2017 over 2016, according to the IEA, or 1.3m b/d according to Mr Maugeri.
Those numbers are particularly ominous for hopes that the market will tighten because the output of the US shale industry had barely budged by the start of this year. Production in the “lower 48” states of the US, which includes the shale industry, was only 30,000 b/d higher in January than it was in September of last year, according to the government’s Energy Information Administration. Most of the growth in the US came from the Gulf of Mexico, which was up 180,000 b/d over that period, with a contribution from Alaska which was up 40,000 b/d.
US shale drilling has rebounded to its strongest rate since May 2015, however, with 516 rigs last week drilling the horizontal wells used for tight oil production, according to Baker Hughes, the oilfield services group.
The EIA expects that US Lower 48 production will now start to grow rapidly, adding 570,000 b/d between the start of this year and January 2018. US oil groups, which have cut their production costs in shale by about 40 per cent in the past three years, have made a series of announcements in recent weeks about their plans for higher output this year.
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