The International Energy Agency’s (IEA’s) latest report—Oil 2018—is optimistic about the prospects of US oil.
Take a look at the chart alongside. IEA predicts US shale production will continue to surge, resulting in total production from the country touching almost 17 million barrels a day (million b/d) in the next five years, making it the world’s largest producer. That represents an increase of 3.7 million b/d from 2017 or a 71% share of the increase of 5.2 million b/d expected from non-Opec (Organization of the Petroleum Exporting countries) supply. It represents more than half of the total global production capacity growth of 6.4 million b/d expected by 2023.
What are the implications? The IEA forecast firmly puts US in the driver’s seat in driving global oil production. The US will produce far more than Saudi Arabia or Russia by 2023, said Ritesh Jain, chief investment officer at BNP Paribas Asset Management India Pvt. Ltd.
“Of course, for this to materialize, the capex by the energy companies will have to watched and this capex can also be the growth driver for the US economy in the years to come, even if prices remain at the current levels," he added.
More significantly, according to Jain, the surge in US oil production and energy independence is making the country more inward looking. This, says Jain, has enabled the US to turn towards protectionism and to the rising chorus on trade and tariff barriers.
What this means is that the US emerges as the sole winner in this battle unless other countries start ramping up production at the same time, leading to a collapse in prices, which by the way will be good for India, as we import a huge portion of our oil requirements.
What about prices in the short run?
From a near-to-medium term perspective, Brent crude oil prices look to remain supported on positive demand outlook and output restraints from the Opec and non-Opec members led by Russia.
Sugandha Sachdeva, vice-president and in charge (metals, energy and currency research) at Religare Securities Ltd said, “Demand growth over 2018-2019 will be matched up by higher supply from the US, which is rising at a fast pace and means prices will not budge significantly." One must also remember that Opec is not too inclined to carry on with the production cuts through 2019, added Sachdeva.