Few companies understand the inner workings of an oil field more than Core Laboratories (NYSE:CLB). The company makes its living by helping energy companies understand their reservoirs. That gives it keen insight into how much oil the industry can produce.
However, instead of keeping those learnings to itself, Core routinely shares it with its investors, giving them insight into what's going on beneath the surface of the oil market. The company's CEO, David Demshur, presented his latest view during the third-quarter conference call. One of the key takeaways is that there's another gusher of supply coming in 2020. That likely will keep the pressure on oil prices next year, suggesting it could be another challenging one for oil stocks.
Another record year for the oil patch
Demshur started his comments on the outlook for global oil supplies by noting that: "Current worldwide production is about 100 million barrels a day [BPD], an all-time high. This is made up of about 84 million BPD of crude and 16 million barrels of natural gas liquids." To put that supply number into perspective, it's a bit above this year's demand.
That's due in part to strong production growth in the U.S., which Demshur noted:
Is currently at 12.4 million BPD, another record; 8.85 million of this are from unconventionals -- i.e., shale. This is led by the Permian at 4.55 million BPD. Of note is the Eagle Ford is now in permanent decline and the Bakken nears its peak production; 3.35 million barrels are from conventional reservoirs, 1.8 million of this from the Gulf of Mexico, which is also at a record production.
As Demshur pointed out, the U.S. is getting more production from the Permian, Bakken, and Gulf of Mexico, which is more than offsetting the decline in the once fast-growing Eagle Ford shale.
Demshur then noted: "Non-OPEC and non-U.S. production is down for the seventh year in a row, offsetting gains in Russian production, which fell by 50,000 barrels a day in September. OPEC production is right now at an eight-year low at 38.9 million barrels of oil a day, down 750,000 barrels last month, due to the disruption in Saudi production."
Some of the declining output outside of the U.S. is due to the depletion of older oil fields. The rest is coming because OPEC and Russia are purposely curbing their production in an attempt to keep supplies balanced with demand by offsetting some of America's growth.
Another gusher is coming in 2020
Demshur then turned his attention to what's ahead:
Future supply growth will be limited to four countries: the U.S., which is estimated now to be up 700,000 BPD in 2020 -- by the way, we'll take the under on that. Norway, the Johan Sverdrup is to introduce 440,000 barrels of new production in 2020. Guyana, the first oil from Liza is at 190,000 barrels a day early next year. Brazil, probably another 200,000 barrels a day. So a total new supply will be about 1.3 million barrels a day in 2020.
First, he points out that U.S. oil production should continue growing next year, though he believes it will come in less than the currently projected 700,000 BPD increase due to how much drillers are cutting back spending on new wells.
The second driver is the start up of Equinor's (NYSE:EQNR) Johan Sverdrup oil field in Norway, which is the third biggest in the country's history. Equinor began producing from the field in October and has already gotten its output up to about 200,000 BPD. That's nearly halfway to the expected capacity of its first phase, which it should reach next year.
Third, ExxonMobil (NYSE:XOM) expects to start up the first phase of its Liza project in Guyana by the end of this year. It's one of five developments that Exxon and its partners plan to build in that region by 2025, which could ultimately produce 750,000 BPD.
Finally, Brazil will bring on some new fields that will boost its output. Add it all up and those four sources will bring a net 1.3 million BPD of new supply next year, assuming OPEC and its partners maintain their current production cuts and output falls elsewhere as expected. That growth rate would put supplies a bit ahead of projected demand growth, which the International Energy Agency (IEA) pegs at 1.2 million BPD next year. It initially anticipated that demand would grow by 1.3 million BPD, but cut its view due to concerns over global economic growth. Given that outlook, the IEA sees supplies outpacing demand for much of next year, which will likely keep a lid on oil prices.
On a more positive note, Demshur pointed out that "significantly lower adds are targeted for 2021 and 2022." If that happens, and oil demand continues rising, then oil prices could begin improving toward the end of next year.
Still too much supply
Core Labs has done the math and sees four sources adding another 1.3 million barrels of crude to an already saturated oil market. With demand growing at a slightly slower pace, that spells bad news for oil prices and oil stocks. That is unless, of course, U.S. drillers and OPEC make more cuts or demand growth accelerates thanks to an uptick in the global economy. Either of those factors could help bring the market back into balance, which would likely help support crude prices.