When it comes to oil supply cuts, don’t look to OPEC—look to Texas and North Dakota.
The U.S. will be the single largest contributor to a historic global drop in crude supply this year, according to an estimate from the International Energy Agency’s monthly oil report on Thursday.
Worldwide cuts to oil production are expected to decline by 12 million barrels per day by the end of the year, the agency said, with U.S. production expected to drop by 2.8 million barrels per day.
“By the end of 2020, it is the U.S. that is the biggest contributor to global supply reductions,” said Fatih Birol, the executive director of the Paris-based agency, surpassing even expected cuts from Saudi Arabia.
Those cuts are the result of rapid shut-ins in the U.S. shale patch, which went into the oil crash with high debt levels; activity levels dropped to record lows, and companies large and small cut unprofitable production.
And nowhere is that impact greater than in the Permian Basin, the producing region at the heart of the U.S. shale boom, which turned the U.S. from an oil importer to an exporter in a matter of years. Large-scale, immediate cuts to production by the region’s largest players, particularly Exxon Mobil and Chevron, have led the way, the IEA notes.
Those cuts come alongside sharp production declines from other non-OPEC+ countries, particularly Canada, but also Norway and Brazil, Birol said.
And the supply drop comes alongside the easing of global lockdowns, which is putting some life back in demand for oil for industry and travel, and producing early signs of a “gradual rebalancing” on oil markets, said Birol.
“It is still gradual, and it is still fragile,” he cautioned.
Crude prices continued their rebound on Thursday. The global benchmark, Brent Crude, was up nearly 4%, with West Texas Intermediate climbing more than 5%. Brent and WTI are down more than 50% year to date, among the commodities hardest hit by the economic fallout of the COVID-19 pandemic.
Global oil demand is expected to fall by 8.6 million barrels per day across 2020, the IEA estimated, a reduction of last month’s forecast of a fall of 9.3 million barrels per day, based on expectations that lockdowns will continue to ease, and there will not be a resurgence of COVID-19 later this year.
Last month, Birol warned that 2020 would see a record fall in annual demand, and said April would mark the bottom—“black April”—with a 29 million barrel per day drop in demand, coinciding with global lockdowns and arriving before large-scale production cuts could go into place. That overall picture has been borne out, he said Thursday.
“Our numbers do confirm that we are on track, that 2020 will be the worst year and April will be the worst month,” he said.
Stocks too, which have been dramatically built up as producers looked for space to store oil amid a storage crisis, could also start to decline in the second half of this year, the IEA said, as the drop in supply draws down strategic reserves.
However, Birol stressed that the market was far from rebalancing—oil markets are still in the midst of a historic hit to demand, he said.
“It is far too early to say we are soon going to reach a rebalancing of the markets. We are just in the beginning of that process.”