Cobas AM: Nueva Gestora de Francisco García Paramés

 The IEA’s policies will accelerate the huge slowdown we are about to experience in non-OPEC oil supply growth. Just like what happened between 2003 and 2008, OPEC will gain market share and pricing power — a situation the IEA acknowledges and even seems to be encouraging. 

Over the last decade, surging US shale oil and NGL production added almost 10 mm barrels per day to non-OPEC oil supply, leaving OPEC in a defensive position. OPEC’s spare capacity was unleashed twice over the last decade (2014 and 2020) to protect and regain market share that had been lost to the US shales. Now that non-OPEC oil supply is set to contract, OPEC sits in the enviable position of regaining market share and pricing power. Significant potential price spikes may occur as OPEC once again flexes its control over prices. 

Energy analysts are convinced global oil demand, for ESG and EV reasons, will collapse faster than non-OPEC supply, putting pressure on OPEC to wage incessant market share wars. Instead, our global oil demand analysis (extensively discussed in these letters over the years) continues to suggest further growth in oil demand this decade, a viewpoint far from consensus. In retrospect, the COVID-19 related retrenchment in oil demand now looks to have been of far smaller magnitude than originally thought and the rebound in global oil demand is proceeding at a pace much faster than originally anticipated. 2019 pre-COVID oil demand levels now look like they will be exceeded within the next six months. Not only has China made significant new highs in oil consumption, but it now looks like the United States’ oil demand has made new highs as well. The resiliency of global oil demand, even in the face of a global economic lockdown, supports our demand analysis and gives us confidence that oil demand will continue to show growth this decade. 

 The biggest unintended consequence is clearly and ironically alluded to in the IEA’s own May 17th press release. The IEA states: “The contraction of oil and gas production will have far-reaching implications for all the countries and companies that produced these fuels. […] Supplies become increasingly concentrated in a small number of low-cost producers. OPEC’s share of a much-reduced global oil supply grows from around 37% in recent years to 52% in 2050, a level higher than at any point in the history of oil market. 

 Back in the early 2000s, we became very bullish on oil prices. I was profiled in Barron’s February 9th 2004 edition in an article titled: “Pumped Up: A Natural Resource Maven Sees a Long-Term Bull Market for Oil.” In the profile, I stated: “We’re just beginning to see a noticeable slowdown in non-OPEC supply of oil, which is bound to press more power into the hands of the oil cartel.” At the time, oil stood at $35 per barrel. Four years later, oil had eclipsed all expectations and surged to $145. What explained the four-fold surge in less than 5 years? In retrospect, the answer is simple: after a dramatic slowdown in non-OPEC oil supply growth, OPEC gained market share and pricing power.

In 2004, non-OPEC oil supply was set to experience a sharp slowdown in growth. Supply from some of the world’s largest producing fields and regions (Prudhoe Bay in Alaska, Cantarell in Mexico and the North Sea) were all exhibiting accelerating production declines while the great US oil shale boom was still half a decade away. As a result, non-OPEC oil supply experienced no growth between 2003 and 2008. Over that period, we wrote repeatedly to our investors: “Remember, the biggest competitor to OPEC oil is non-OPEC oil and when the growth of non-OPEC slows, OPEC gets pricing power. 

 Between 2002 and 2008, OPEC’s market share of global production went from 38% to 43%. This small increase in market share resulted in huge OPEC pricing power allowing crude to advance four-fold in five years. The same chain of events that started in 2004 is about to be repeated with a vengeance. 

The IEA’s policies will accelerate the huge slowdown we are about to experience in non-OPEC oil supply growth. Just like what happened between 2003 and 2008, OPEC will gain market share and pricing power — a situation the IEA acknowledges and even seems to be encouraging.