IEA hedges bets on new 20-year supply peak in non-OPEC oil

The International Energy Agency has painted a picture of softer market fundamentals in 2014, but gone to lengths to point out a number of intangibles which could ultimately derail its latest predictions.

Fleshing out for the first time its oil market forecasts for 2014, the IEA believes the US’ shale oil boom will continue to underpin surging non-OPEC supply next year.

Non-OPEC oil production should increase by more than 1.3 million b/d in 2014, the highest growth in 20 years, with US crude production alone making up 530,000 b/d of the growth forecast, the IEA forecast in its latest monthly report this week.

The two-decade peak in oil output growth from non-OPEC producers will outpace global demand growth and continue to dent OPEC’s share of the global oil market, it said.

This view broadly supports received opinion of market watchers that the global oil market is currently oversupplied, with only fears of fresh supply disruptions in the wake of the so-called Arab Spring spoiling the party.

On the supply side, however, the IEA sounded a note of caution over its supply forecasts, noting that geopolitical unrest, mechanical outages, rising costs, and falling prices could all collude to crimp actual output gains.

Geopolitical risk in Yemen, Sudan/South Sudan, Egypt, and Syria all have the potential to worsen, the IEA said, further disrupting supplies and taking the shine off the US shale supply impact.

On costs, swaths of US tight oil plays could face breakeven setbacks if drilling and development costs continue to climb at rates seen in 2012, the IEA notes.

Aggravated by intense demand for oilfield services, rising costs will dent producer margins and lead to a decline in investment activity and production levels, it said.

Conversely, the IEA argued that non-OPEC production could also surprise to the upside if oil prices remain stubbornly buoyant. Russian producers are benefiting from recent tax changes and high Urals prices, it noted, and Brazil’s deepwater bonanza could find more traction if its FPSOs are delivered on schedule.

On the demand side, the IEA also flagged a “significant risks” over the demand outlook due to macroeconomic uncertainty.

Citing downside risks to the IMF’s 4% growth forecast for 2014, the IEA concedes that its 1.2 million b/d oil demand growth forecast could prove “optimistic.”

The IMF said in April that the absence of fiscal consolidation in the US and Japan, high private sector debt, and insufficient progress to resolve the Eurozone debt crisis could endanger is growth estimates.

Platts