Energy Stat of the Week

Energy Stat: How Much Can OPEC Really Ramp Up Supply Once the Cuts' Agreement Expires?
December 18, 2017

In our recent Stat of the Week from December 4, we addressed the decision by the OPEC coalition (OPEC plus Russia) to extend production cuts through 2018 and the impact upon our global oil model. As a follow up, today’s report takes the discussion a step further and tries to quantify the OPEC coalition’s potential production increase after the cuts expires at year-end 2018. Put simply, expectations for OPEC supply growth in a post-cut world appear to be far too aggressive, with many industry pundits mistakenly assuming that global oil supply will surge by ~1.8 million bpd once the cuts expire. This is a gross overestimation of real OPEC coalition production growth potential by 2019. That is because the headline OPEC coalition cut numbers are based off artificially inflated and unsustainable rates from late 2016. As shown below, the OPEC coalition (excluding the volatile wildcards of Venezuela, Iran, Nigeria, and Libya) artificially raised production by about ~660,000 bpd in the back half of 2016, to give the illusion of larger cuts into 2017. When comparing early 2016 “sustainable” production levels to actual production in 2017, the “real” OPEC coalition cuts have amounted to only about 620,000 bpd this year. While some of these countries will likely grow production capacity by 2019, we still believe that sustainable OPEC coalition production growth by 2019 should be less than half of the 1.8 million bpd headline estimates (and OPEC claims). The bottom line is: there is no plausible scenario under which at the end of the cuts, oil supply would dramatically flood the global oil market in 2019.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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Marshall Adkins

J. Marshall Adkins
Director of Energy Research