New production projects and a fresh shale boom could boost oil output by a million barrels per day and result in an oversupply in the next couple of years, according to a report by Goldman Sachs.
“2017-19 is likely to see the largest increase in mega projects’ production in history, as the record 2011-13 capex commitment yields fruit,” the U.S. investment bank said in a research note.
OPEC’s landmark decision to limit output for the first time in eight years in a bid to arrest the existing supply glut reduced price volatility and increased stability, unintentionally helping the shale producers, the bank said.
“OPEC’s decision in November 2016 to cut production was rational, in our view, and fit into its role of inventory manager of last resort,” Goldman said.
“However, the unintended consequence was to underwrite shale activity through a bullish credit market at a time when delayed delivery of the 2011-13 capex boom could lead to record non-OPEC production growth in 2018.”
OPEC agreed to curb its output by about 1.2 million bpd from January this year. Russia and 10 other non-OPEC producers agreed to jointly cut by an additional 600,000 bpd.
OPEC is likely to weigh the risk of long-term market share loss against the benefit of stability before taking a call on extending production curbs, with the industry expected to bring “onstream a multi-year pipeline of giant developments that tails off only by 2020,” Goldman said.
“U.S. shale oil currently offers large-scale development opportunities with 6-9 months to peak production. In this environment, OPEC’s rational decision is to leverage on its cost leadership to maximize market share, while managing short-term inventory imbalances,” the bank said.
OPEC will have to extend its oil output curbs in order to sustain a recovery in prices, as a revival in crude production outside the group may scupper its efforts to erode an overhang of unused inventory, a Reuters poll of analysts showed last week.