New projects, shale boom trigger oil oversupply by 2018-19: Goldman Sachs

An extension of the OPEC supply cut deal will likely add to the US shale boom, resulting in oil oversupply in the coming years. Anadarko photo.

Shale boom could boost output by one million b/d

New crude production projects and a revived US shale boom could boost oil output by one million b/d, adding to the supply glut in the coming few years, according to a research note released on Tuesday by Goldman Sachs.

In the note, the US investment bank said “2017-19 is likely to see the largest increase in mega projects’ production in history, as the record 2011-13 capex commitment yields fruit.”

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Last November, OPEC decided to implement a production cut to reduce the global supply glut.  The decision to decrease cartel and other non-member’s production was made in an effort to reduce price volatility and increase market stability, but it unintentionally gave a boost to US shale producers.

Goldman said the pact was a rational decision and “fit into its role of inventory manager of last resort”.

“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.”

Under the OPEC supply cut deal, the cartel agreed to cut output by about 1.2 million b/d beginning on Jan.1.  Russia along with some other non-member countries agreed to chop their production by 600,000 b/d.

Since the deal was announced, prices have recovered, but are now under pressure as the crude glut has shown few signs of easing.

Goldman says OPEC is likely to weigh the risk of long-term market share loss against the benefit of stability before making a call on extending the pact.  Another factor in the decision is the oil industry is expected to bring “onstream a multi-year pipeline of giant developments that tails off only by 2020”, according to Goldman.

“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,” Goldman wrote.

In a Reuters poll, analysts said OPEC will have to extend its oil output curbs to sustain the recovery in oil prices, but increased crude production outside the group may erode efforts to cut into the oil glut.