| | | <Can OPEC+ flood the world with crude? It's harder than oil traders think.
Provided by Dow Jones
Jul 1, 2025, 12:00:00 PM
By Myra P. Saefong
Major oil producers meet this weekend to decide on August production levels
Bearish oil traders foresee a world soon to be awash in crude, but it might be a lot harder to oversupply the market than widely thought, thanks to one overlooked factor - at least according to one portfolio manager who's covered the industry for more than 30 years.
A natural decline in the rate of production as oil wells age may already be helping to tighten global crude inventories, even as major oil producers look to boost output for a fifth straight month.
Eventually, the "price of crude oil will rise as the market realizes that it is difficult to oversupply the market other than in the short term, and that global [production] decline rates will be difficult to overcome," said Stan Majcher, portfolio manager at Hotchkis & Wiley.
Eventually, the 'price of crude oil will rise as the market realizes that it is difficult to oversupply the market other than in the short term, and that global decline rates will be difficult to overcome.'Stan Majcher, Hotchkis & Wiley
So far this year, however, the market does not appear to be afraid of demand outpacing supply because the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, are signaling increases in supply, he told MarketWatch by email. That, combined with additional supplies from the U.S., Guyana, Brazil and others, is expected to more than meet demand for oil, he said.
Eight OPEC+ members started in April to gradually phase out their voluntary production cuts that began back in January 2024, and then sped up the planned reintroduction of those barrels of oil in May, June and July. The eight OPEC+ members plan to hold their next meeting on July 6 to decide on output levels for August.
U.S. oil prices had been trading below $60 in the weeks before the Israel-Iran conflict began on June 13 because the market was already a bit oversupplied - and then OPEC+ continued to announce production increases exacerbating the issue, said Ted Gardner, senior vice president and co-portfolio manager for Westwood's Enhanced Midstream Income ETF MDST and Enhanced Energy Income ETF WEEI.
The risk to supply brought on by the conflict - the potential hit to Iran's oil-export capacity and possibility of the closures of the Strait of Hormuz - led to a rise in oil prices, he said. Even then, many believed such a scenario was unlikely, Gardner said, and now that it appears to be an even more remote probability, the "risk premium has come out of oil."
On Monday, U.S. benchmark West Texas Intermediate crude (CL.1) (CLQ25) settled at $65.11 a barrel on the New York Mercantile Exchange, posting a loss of 9.2% for the first six months of the year. Global benchmark Brent crude saw its August contract (BRN00) (BRNQ25), which expired at the end of Monday's session, finish at $67.61, losing 9.4% in the first half of 2025.
However, Majcher referred to the situation surrounding supply as "unique."
"The composition of supply is completely different than past cycles," he told MarketWatch. "The market is looking at the past for what will unfold, and the past is very different from today."
The time it takes to "balance the market naturally is how fast oil demand grows, but more importantly, how quickly supply adjusts either through OPEC cutting or production growth falling," he explained.
The difference today from say, when Russia invaded Ukraine in 2022, is the "underlying decline rate of global [oil] production," said Majcher. Oil and natural-gas supply is unique in that it comes from wells that are under pressure - and "as they produce, the rate of production declines," he said.
On a historical basis, oil was produced primarily from conventional reservoirs that were assumed to decline at a global rate of about 6% on average, and projects took years from initial drilling to production, so producers didn't like to cut capital expenditures. Members of OPEC, meanwhile, were helpful in balancing a market that "would've taken longer to balance left to its own devices."
The underlying rate of global production has quickened. In a report from August 2024, ExxonMobil Corp. (XOM) said global oil and natural-gas supplies would "virtually disappear without continued investment." It estimated that oil production would naturally decline at a rate of about 15% per year. In other words, with no new investment, global oil supplies would fall by more than 15 million barrels per day in the first year alone, ExxonMobil said.
"Decline rates of existing fields are the biggest driver for new supply needed, and the reason significant investment is still required even before accounting for demand growth," the ExxonMobil report said. "The annual decline of existing supply is higher now, with an increasing mix of unconventional resources, such as U.S. tight oil, which decline faster than conventional oil and natural gas resources."
Declines in U.S. unconventional oil production, or crude oil derived from methods other than traditional vertical drilling and pumping, is "staggering," said Majcher.
The U.S. decline rate is at a pace roughly equivalent to what Canada produces on a yearly basis - at around 6 million barrels per day, he said, so the "U.S. needs to add a Canada of oil production to stay flat." That gets harder and harder over time, he said.
U.S. production is likely to decline at current prices, said Majcher. "There are signs that that is currently happening."
U.S. crude-oil production was at 13.44 million barrels per day for the week ended June 20, down from 13.57 million three months ago, according to the Energy Information Administration. Weekly data shows production was at a record high of 13.63 million for the week ended Dec. 6, 2024.
The oil market is seeing OPEC+ adding to global supply and assuming that there is no room for these additional barrels, said Majcher. However, he believes the decline rate in global oil production will "eat up the excess supply fairly quickly to balance the market."
-Myra P. Saefong>
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