The Oil Outlook Turns Bearish

Note: This article originally appeared on Forbes.

OPEC’s 172nd ordinary meeting will take place next week in Vienna, Austria. At that meeting, the cartel will decide whether to extend crude oil production cuts that were enacted following the group’s meeting last November.

News reports indicate that both Saudi Arabia and Russia are for extending the production cuts for another nine months. I would argue that they have little choice, and even then growing U.S. shale output threatens to negate those production cuts.

OPEC is finally beginning to recognize this.

OPEC’s outlook for non-OPEC supply growth this year has changed dramatically over the past year — but especially since January. In August 2016 OPEC was projecting that non-OPEC supply would decline by more than 100,000 barrels per day (BPD) in 2017. By the time the group announced production cuts in November, it had changed its forecast to one of growth in non-OPEC production to just over 200,000 BPD.

Given the International Energy Agency’s forecast at that time of 2017 crude oil demand growth of ~1.5 million BPD, OPEC was confident the production cuts — totaling ~1.8 million BPD between OPEC members and some large non-OPEC members — would quickly bring the oil market back into balance.

But OPEC just put out a new forecast in which they now project non-OPEC growth of 950,000 BPD this year — led by U.S. shale oil production. Thus, in less than a year OPEC’s view of non-OPEC oil production growth has increased by over one million BPD.

Likewise, the Energy Information Administration’s (EIA) latest Short-Term Energy Outlook has turned more pessimistic about global crude oil inventories. Just a few months ago the EIA expected inventories to start dropping this year. Now, they expect supply and demand to be in balance for the rest of 2017, and for production to again pull ahead of demand in 2018. This is primarily due to U.S. oil production that they project will rise by ~1 million BPD by next year.