Canadian oil production surged 240,000 bbls/d in November to stand just below five million bbls/d, and growth this year will be powered by Fort Hills and Hebron, the International Energy Agency (IEA) said today in its first monthly review of the oil market.

The shutdown of the 590,000 bbl/d Keystone pipeline for two weeks in November had no material impact on supplies, with unupgraded bitumen output rising 105,000 bbls/d month-on-month to nearly 1.8 million bbls/d. Offshore output averaged 230,000 bbls/d compared with 217,000 bbls/d in October, as Exxon Mobil Corporation’s 150,000 bbl/d Hebron reported first oil.

The majority of Canada’s supply growth this year, estimated at 280,000 bbls/d, will come from Hebron and Suncor Energy Inc.’s 194,000 bbl/d Fort Hills oilsands mining project.

U.S., Canada, Brazil will lead non-OPEC growth 

Rapid U.S. growth and gains in Canada and Brazil will drive up non-OPEC supply by 1.7 million bbls/d in 2018, versus last year’s 700,000 bbl/d increase. U.S. crude supply will push past 10 million bbls/d, overtaking Saudi Arabia and rivalling Russia.

A plunge in Venezuelan supply cut OPEC crude output to 32.23 million bbls/d in December, boosting compliance to 129 per cent. Declines are accelerating in Venezuela, which posted the world’s biggest unplanned output fall in 2017.

Demand estimates in 2017 and 2018 are roughly unchanged at 97.8 million bbls/d and 99.1 million bbls/d respectively. A 40,000 bbl/d downward revision to 2016 demand, however, pushed up the 2017 growth to 1.6 million bbls/d, while the IEA’s growth estimate for 2018 remains unchanged at 1.3 million bbls/d. 

The slowdown in 2018 demand growth is mainly due to the impact of higher oil prices, changing patterns of oil use in China, recent weakness in OECD demand and the switch to natural gas in several non-OECD countries. 

Global oil supply in December eased by 405,000 bbls/d to 97.7 million bbls/d due mostly to lower North Sea and Venezuelan output. Production was steady on a year ago as non-OPEC gains of nearly one million bbls/d offset declines in OPEC. 

Expect a volatile year

The price of Brent crude oil closed earlier this week above $70/bbl for the first time since  Dec. 2, 2014 (shortly after OPEC’s “market share” ministerial meeting) and money managers have placed record bets on the recent upward momentum continuing. The factors contributing to this burst of optimism by investors include: the possible unravelling of the Iran nuclear deal and recent demonstrations in the country, disruption to the industry in Libya, and the closure of the Forties pipeline system. Although these factors might have faded somewhat, there are others at work. The general perception that the market has been tightening is clearly the overriding factor and, within this overall picture, there is mounting concern about Venezuela’s production, the report stated.

Taking Venezuela first, production has been sliding for a long time — it is now about half the level inherited by President Hugo Chavez in 1999 — and in December output was 490,000 bbls/d lower than a year ago, having fallen to 1.61 million bbls/d. “It is reasonable to assume that the decline will continue but we cannot know at what rate,” the report stated. If output and exports sink further other producers with the flexibility to deliver oil similar in quality to Venezuela’s shipments to the U.S. and elsewhere, including China, might decide to step in with more bbls of their own.

The oil market is “clearly tightening,” according to the IEA.

In the three consecutive quarters Q2 17-Q4 17 OECD crude stocks fell by an average of 630,000 bbls/d; such an event has happened rarely in modern history, according to the report. Examples include 1999 (prices doubled), 2009 (prices increased by nearly $20/bbl), and 2013 (prices increased by $6/bbl). Since the nadir for Brent crude in June when the price was $45/bbl, the 2017 OECD crude draws have coincided with a price increase for Brent of nearly $25/bbl.

Pricing sustainable?

A judgement as to whether the recent price strength is sustainable must take into account the rapid growth in global oil supply seen recently and which will continue through 2018, the IEA said.

Short-cycle production from the U.S. is reacting to rising prices and in this report, the IEA raised its forecast for crude oil growth there in 2018 from 870,000 bbls/d to 1.1 million bbls/d.

“It is possible that very soon U.S. crude production could overtake that of Saudi Arabia and also rival Russia’s,” the report stated.

After adding in bbls from Brazil, Canada and other growth countries, and allowing for falls in Mexico, China and elsewhere, total non-OPEC production will increase by 1.7 million bbls/d. This represents, after the downturn in 2016 and the steady recovery in 2017, a return to the heady days of 2013-2015 when U.S.-led growth averaged 1.9 million bbls/d. 

“This projected big increase in non-OPEC production needs to be set against our current forecast for oil demand,” the IEA stated.

For 2018, it sees growth of 1.3 million bbls/d, a conservative number that acknowledges the current perception of healthy global economic activity, but also takes into account the fact that benchmark crude oil prices have increased by 55 per cent since June and this can dampen oil demand growth to some extent.

“The uncertainty surrounding Venezuela is such that our regular practice of showing a market scenario chart that assumes steady OPEC production must be treated with caution. If OPEC countries plus their non-OPEC supporters maintain compliance then the market is likely to balance for the year as a whole with the first half in a modest surplus and the second half in a modest deficit,” the IEA stated. 

This scenario, or something similar to it, presumably “lies behind the assumption by forecasters surveyed by Reuters that Brent will trade in a $60-$70/bbl range in 2018. Whether or not the recent price rise has run out of steam and $70 really is plenty remains to be seen. However, such are the geopolitical uncertainties and the ever-dynamic prospects for U.S. shale that we should expect a volatile year.”