The new International Energy Agency (IEA) report on oil supply and demand is out. The organization’s research shows that oil supply may top demand later this year.

The primary cause is a sharp uptick in supply from the United States. What might have been a year in which oil prices would rise, American crude may turn into a year of price stability, or falling prices. The news is mixed for the industry and its profits.

According to the IEA monthly report:

[I]n 2018, fast rising production in non-OPEC countries, led by the US, is likely to grow by more than demand. For now, the upward momentum that drove the price of Brent crude oil to $70/bbl has stalled; partly due to investors taking profits, but also as part of the corrections we have seen recently in many markets. Most importantly, the underlying oil market fundamentals in the early part of 2018 look less supportive for prices.

Oil demand this year is expected to be 1.6 million barrels a day. However, American shale will be the most important driver of supply this year:

The main factor is US oil production. In just three months to November, crude output increased by a colossal 846 kb/d, and will soon overtake that of Saudi Arabia. By the end of this year, it might also overtake Russia to become the global leader. All the indicators that suggest continued fast growth in the US are in perfect alignment; rising prices leading, after a few months, to more drilling, more completions, more production, and more hedging. In early 2018, the situation is reminiscent of the first wave of US shale growth that, riding the tide of high oil prices in the early years of this decade, made big gains in terms of market share and eventually in 2014 forced a historic change of policy by leading producers. Today, having cut costs dramatically, US producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth.

This could start a cycle of higher production by other large suppliers, which include Organization of Petroleum Exporting Countries (OPEC) members and Russia. That, in turn, should drive prices lower. And the price drop will erode margins, even among U.S. producers. The entire industry could tip back toward oversupply, which may be good for consumers but bad for much of the industry.

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