Oil supply from the Organisation of Oil Exporting Countries has to increase considerably by 2020 to keep up with dropping production from non-OPEC sources, a new report by Bank of America Merrill Lynch has said.
With oil prices recently reaching below $30 per barrel, current production from mature fields is set to decline at higher rates.
“The structural shift toward a lower price environment will have profound and long-lasting consequences for non-cartelised production,” the report said.
Total non-OPEC supply is anticipated to decrease to 56.4 million barrels per day in 2017 before rebounding to 57.5 million bpd in 2020, near 2015 output levels.
While several fields in the United States Gulf of Mexico, Canada and Brazil that were initiated before the price crash will come online in the next three years, all of them have break-even costs above current prices.
Hence a recovery in non-cartelised production rests upon a medium term recovery in oil prices, the report highlighted.
If spot prices remain within $30-40 per barrel or forward prices stay below $50 per barrel, no incremental conventional or unconventional projects will be sanctioned, it added.
However, although non-OPEC conventional production looks set to drop across the board by 2020, shale may continue growing.
That’s because the investment cycle for shale is shorter than for conventional production.
“As such, we see US shale output falling by 470,000 bpd in a $40 per barrel WTI environment, while growth returns at $50 per barrel. Above $60 per barrel, growth stands above 400,000 bpd.”
With the US the only country able to ramp up its production materially in non-OPEC by 2020, the cartel may have to provide the incremental barrels, the report stated.
It added: “We estimate that OPEC needs to increase production by 4.1 million bpd in the next five years to “balance the market”. Can Saudi’s self-reported 2.1 million bpd of spare capacity fill half of this gap? Could cash-strapped OPEC countries like Iran, Nigeria, or Venezuela expand their capacity? And what will happen to embattled Libyan and Iraqi production in this period?
“Our medium-term supply forecast has to uncomfortably assume OPEC has 2020 vision.”