To set a floor under oil prices, OPEC is showing remarkable restraint by holding back production. But that effort keeps getting undermined by the American shale oil boom.
That problem for OPEC doesn't seem to be going away. OPEC warned on Thursday of a supply glut in 2020 despite the cartel's newly-extended agreement with Russia to cut production.
OPEC pinned the blame on record-setting output from the United States, specifically the Permian Basin of West Texas, the epicentre of the shale revolution.
"Production from the booming Permian Basin is forecast to grow without any constraints," OPEC wrote in its monthly report.
That growth is good news for American drivers, who should benefit from gas prices staying in check.
OPEC noted that America's oil infrastructure problems — namely, limited pipelines linking Texas to refineries in the US Gulf Coast — will go away as new capacity is completed in the coming months.
US shale is likely to "dominate" non-OPEC supply growth in 2020, OPEC said.
Texas alone is expected to soon top 5 million barrels per day in oil production — more than any OPEC member other than Saudi Arabia.
OPEC for the first time projected world appetite for its oil for 2020, and the numbers aren't pretty. The cartel expects demand for its output will decline next year by 1.3 million barrels to 29.27 million.
At the same time, OPEC said its production dipped slightly in June to 29.83 million barrels. That implies a surplus of about half a million barrels, assuming OPEC continues to pump at current levels.
Earlier this week, the US Energy Information Administration dimmed its view on oil demand because of concerns about slowing economic growth. The EIA expects global oil demand will rise by 1.1 million barrels per day in 2019, down by 200,000 barrels from its June forecast.
Record-shattering US oil growth
The oversupply in 2020 comes as OPEC and its allies attempt to bring about equilibrium in the market. Earlier this month, OPEC agreed to extend its production cuts until March 2020. Those cuts, first implemented in 2017, were set to expire.
"If there is a glut, it will be US-driven," said Ryan Fitzmaurice, energy strategist at Rabobank.
The bearish OPEC forecast follows a recent rebound in oil prices. US oil soared above $60 a barrel on Wednesday on the heels of a report showing a surprise plunge in crude inventories in the United States and concerns that Tropical Storm Barry could derail production in the Gulf of Mexico.
Oil prices have also benefited from elevated tensions between the United States and Iran.
The shale boom has mitigated supply concerns caused by the Iran tensions as well as US sanctions on Venezuela.
In 2018, the United States pumped an average of 11 million barrels per day, marking a record high for total production as well as year-over-year growth, according to the US Energy Information Administration.
The EIA projects a deceleration in US growth for 2020, but still another record-high of 13.3 million barrels per day. Most of the extra barrels are expected to come from the Permian Basin, the EIA said.
US oil exports could triple
The continued shale boom will pave the way for more US oil to get shipped overseas, competing with barrels sold by OPEC.
Thanks to pipeline expansions and port enhancements in Corpus Christi, Texas and elsewhere, OPEC said daily US oil exports are expected to nearly triple from about 1 million barrels currently to 2.9 million barrels by the end of 2020.
Some analysts believe OPEC is too negative on the world's thirst for oil.
New regulations, known as IMO 2020, will require ships next year to use low-sulfur fuel in a bid to reduce emissions. That shift away from dirtier fuel will force refineries to use more oil and run at a faster clip.
"Assuming there isn't a total economic collapse, the IMO will show healthy demand increases," said Rabobank's Fitzmaurice. "I'm still bullish on oil prices."