Prolific oil production from U.S. shales is weighing on the need for imports, OPEC acknowledged in its latest Monthly Oil Market Report (MOMR), and analysts at Barclays predicted that the Organization of the Petroleum Exporting Countries will see its influence over market balances decline over the next few years.
"Positive developments in U.S. shale oil supplies, which imply further reduced U.S. imports, also contributed to the shift toward a more bearish sentiments at the end of the month," OPEC said in its just-released July MOMR.
Barclays said in a note Thursday that tight oil production growth in the United States "continues to surprise to the upside" this year, so much so that it is starting to re-shape long-held patterns in global balances. "This is leading to an enduring reduction in the oil market's need for OPEC crude for the first time in many years," said analysts Kevin Norrish, Afonso Campos and Miswin Mahesh.
To be sure, the U.S. shale miracle has been rippling through the global oil pool for a while. Last May, International Energy Agency (IEA) Executive Director Maria van der Hoeven said as much when she released IEA's Medium-Term Oil Market Report, which predicted that the effects of surging North American supply will flow across global markets (see Shale Daily, May 15).
OPEC is watching, of course. "More crude is moving out of the Midcontinent [United States], easing the pressure on storage at Cushing [OK]," the July MOMR said. "Prices of local grades, such as Light Louisiana Sweet (LLS), are falling relative to WTI [West Texas Intermediate], as crude stocks build on the U.S. Gulf Coast. Rising production from the Eagle Ford Shale formation in Texas, as well as more shipments from the Midcontinent, have left Gulf Coast refiners with an excess of light crude supplies."
According to the latest Short Term Energy Outlook (STEO) from the U.S. Energy Information Administration (EIA), the country's crude oil production increased to an average of 7.3 million b/d in April and May 2013, which is the highest level of production since 1992. EIA forecasts U.S. total crude oil production will average 7.3 million b/d in 2013 and 8.1 million b/d in 2014, the STEO said.
Meanwhile, demand for OPEC crude for this year is forecast to average 29.9 million b/d, almost unchanged from the previous MOMR and a decline of 400,000 b/d from 2012. Based on the initial 2014 forecasts for world oil demand and non-OPEC supply, including OPEC natural gas liquids (NGL), demand for OPEC crude next year is projected to average 29.6 million b/d, representing a decline of 300,000 b/d, the latest MOMR said.
Continued modest expansion of OPEC spare capacity will make the market less susceptible to supply disruption and upside price risk while reducing the cartel's pricing power "...since even a small loss in market share significantly reduces the group's leverage over supply trends and price," Barclays said.
The analysts said the firm has "become much less positive on the long-term outlook for oil prices," tweaking its second-half 2013 price forecast down modestly and making "considerably larger" adjustments to its longer-term outlook. The firm's fourth quarter Brent crude average price is now $105/bbl, down from $114. Barclays cut about $20/bbl from its 2014 and 2015 Brent price forecasts, which now stand at $110 and $115, respectively.
According to the firm, the average annual call on OPEC crude oil and NGLs has fallen only four times since 1985. These instances were the result of economic factors: the bursting of the tech bubble and constraints on credit.
"What is different this time around is that the current reduction in the requirement for OPEC crude is only partly related to cyclical demand fluctuations and is more to do with accelerating non-OPEC supply growth.
"...[T]he picture we previously envisioned of a tight oil market with non-OPEC supply failing to keep up with demand growth has been turned on its head. Instead, OPEC will come under consistent pressure to limit its output growth in order to accommodate further reductions in U.S. oil import demand as domestic output continues to substitute for oil from other countries."