At Monday’s opening session of CERAWeek, an annual major energy industry conference in Houston, the International Energy Agency (IEA) released its latest medium-term oil market report, indicating strong growth in demand could outpace supply by 2020. Unless new projects are begun soon, supply will fall behind demand, with the possible consequence of a sharp spike in crude prices.

The IEA expects global demand to surpass 100 million barrels per day in 2019 and reach 104 million barrels a day by 2022. Developing countries, primarily in Asia, account for all the projected growth, or roughly 70% of production growth.

New supply will come primarily from the United States, according to the IEA. U.S. production will increase by 1.4 million barrels a day by 2022 if crude oil prices remain around $60 a barrel. If prices rise to $80 a barrel, crude production from U.S. shale plays (what the IEA refers to as light, tight oil, or LTO) could increase by as much as 3 million barrels a day. That’s more than any other nation currently produces.

Ironically, perhaps, the current production cuts imposed on members of OPEC and subscribed to by several other major producers, including Russia, are expected to drive prices to more than $55 a barrel, with a near-term target of $60. At that price, U.S. shale producers are very likely to ramp up production because virtually all of them can make a profit at that price.

S&P Global Platts said yesterday that OPEC member nation compliance with the production cuts reached 98.5% overall for the first two months of the year. The compliance rate in January was 91%. Saudi Arabia, for example, has produced an average of 9.92 million barrels a day in the first two months of the year, 140,000 barrels a day below its agreed level.

Compliance outside OPEC has been less effective. Russia has committed to a cut of 300,000 barrels a day but the country’s February production was just 121,300 barrels a day less than its October 2016 production. Russia claims that it will reach its full level of cuts by May.

Under the deal agreed to last November, OPEC has pledged to cut 1.2 million barrels a day from production, freezing production levels at around 32.5 million barrels a day by June. For the first two months of the year OPEC production has averaged 32.11 million barrels a day.

Indonesia suspended its OPEC membership in November, but adding in the country’s typical daily production of 730,000 barrels, OPEC’s average rises to about 340,000 barrels a day above the agreed production cuts. Eleven non-OPEC producers also agreed to cut production by 558,000 barrels a day over the first six months of the year. 

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