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Oil supply growth could present downside risk to global prices

Ongoing oil production growth in the U.S. and elsewhere will likely delay any sustained recovery in global oil prices, an analyst with a top bank said at a recent industry event.

Barclays Director and Head of Commodities Research Michael Cohen said March 19 that all of the firm's oil price projection cases, even those of lower economic growth, exceed the current forward curve, but he added, "there's no reason to be bullish based on the perceived supply gap" in the oil market over the next couple of years.

In a March 3 report, analysts at the British bank pegged West Texas Intermediate crude oil prices at an average of $62 per barrel in 2019 before climbing to an average of $68/bbl in 2020. They expect 2019 and 2020 Brent crude oil prices to average $70/bbl and $75/bbl, respectively.

"I don't dispel the idea of a supply gap, it's just that the supply gap in our view is going to come a little bit later," Cohen told attendees of the American Fuel and Petrochemical Manufacturers annual meeting in San Antonio. "If you look at the 2018 level of final investment decisions, they were back at close to the level we saw in 2013 when prices were upward of the $100-range. In 2018 with prices … at a $75 to $80 range, we still saw a significant amount of final investment decisions."

Cohen said that through projects approved between 2011 and 2018, production growth from the North Sea, offshore Brazil and Guyana will add upward of 10 million barrels per day from the 2011 level and up to 6 million bbl/d from the current level.

"In the next two to four years, we're not going to be constrained by geology," Cohen said of U.S. oil producers. "Over the course of the last two to three years … [the] asset level break-even curve for onshore crude has continued to lower and get wider. It's going to be capital that is going to constrain the development of these resources. We see 12 to 13 years of tier-one Permian and Midland inventory that is able to come on. Seventeen years for [the] Delaware [Basin] based on the 2018 drilling case. There's no shortage of resource that can come on. It is just the question of what is the structure of the business."

In the short term, Barclays expects 1.4 million bbl/d of global oil demand growth.

"The problem is … that U.S. supply is almost singlehandedly offsetting that growth in demand," Cohen said. "We are likely to be in a very range-bound market. It is arguably narrower than we've seen in the past couple of years. And that's because we've seen the market surprise at how elastic the demand side is when prices move higher. And we've also seen a much sharper reaction by the U.S. suppliers both on the upside and the downside as prices have either gone higher or lower."

Cohen said U.S. shale production growth outperforming expectations is a downside risk to the oil price outlook, noting that about 30% of 2018 fourth-quarter growth came from private companies.

"You have to understand what the dynamic is and what the elasticity is that's associated with those private companies," Cohen said. "These operators are more responsive to price movements than their listed counterparts not only because they are more agile but also because their access to capital is relatively restricted as it depends more on what prices do."