Is the Saudi oil czar, Khaled Al-Falih losing this round of battle?

Late in January, Al-Falih insisted at Davos that he doesn’t lose sleep over shale, charging instead that the International Energy Agency (IEA) was overstating the role of shale in a global market.

However, Fatih Birol, the current Executive Director at the IEA had openly differed, underlining the growing shale oil output is not a good omen for markets.

And the IEA continues to beat the same drum. In its latest Oil Market Report, the IEA reiterated that global oil supply will grow faster than demand this year. Courtesy the Organisation of the Petroleum Exporting Countries (Opec) output restraint, global oil and product inventories have declined dramatically and are very close to the five-year average, the IEA conceded, yet the surging US supply could tip the balance back into surplus, it highlighted.

This “second wave of growth (in the US output is) so extraordinary” that the supply growth from the US alone could equal total global demand growth in 2018. “[T]he underlying oil market fundamentals in the early part of 2018 look less supportive for prices,” the IEA wrote. The global oil market could slip into deeper oversupply on the back of non-Opec production growth led by the United States, the IEA report emphatically added.

“In just three months to November, US crude output increased by a colossal 846,000 barrels per day (bpd) and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader,” IEA added.

The US Energy Information Administration has in the meantime also reported two consecutive weekly crude oil inventory builds after more than two months of declines. Oil production grew from 9.49 million bpd for the week to January 5 to 10.25m bpd in the week to February 2.

But despite all the apparent calm and composure Falih is showing, Opec is also conceding ground to the growing US output. Opec monthly Oil Market Report revised up its expectations of US shale growth, putting non-Opec supply 1.4m bpd higher than last year, an upward revision of 250,000 bpd from last month’s report.

On the other hand while the Opec continues to maintain high compliance levels with its stated output cuts, indications are growing that the organisation may not be able to keep output under check, and, for long.

S&P Global Platts is reporting that several Opec oil ministers are trumpeting plans to raise production capacity. Kuwait plans to add 225,000 bpd of capacity by end March; Iran’s oil minister is saying it could add 100,000 bpd immediately after the expiration of the output cut agreement; Iraq said it would hit 5 million bpd of capacity by the end of the year, whereas the UAE seems set to add a whopping 500,000 bpd, late in 2018.

Despite the Opec Secretary-General Mohammad Barkindo putting up a brave face and insisting that the recent decline was just a blip and that prices won’t plunge again to US$30 per barrel as they did in 2015 and 2016, many continue to disagree.

Fundamentals are leading many to believe that the current slump is not just a blip. Question marks about the overall demand structure are creeping up once again.

It seems it is not just the futures market that is under pressure but the physical crude markets are also flashing signals that the decline might be far from over, Reuters reported last week.

Traditionally, when oil futures decline, prices in the physical markets tend to rise because crude is becoming cheaper and hence more attractive to refiners. But in recent weeks, differentials in key European and US markets such as North Sea Forties, Russia’s Urals, West Texas Intermediate in Midland, Texas, and the Atlantic diesel market have fallen to multi-month lows, suggesting less robust demand, Reuters underlined.

Hence some are insisting that another round of bloodbath may not be far off. Back in 2014, US shale production was growing so fast that it ended up crashing the market. Now, history could be repeating itself. A “second wave” of shale supply threatens another downturn, the IEA is also projecting.

For the time being at least, good, old friend Fatih Birol seems to be having an upper hand in his ongoing battle with Falih. But one must concede that Falih needs to look back politically, before speaking out.

Published in Dawn, February 18th, 2018