Biggest-Ever Rise in Mega Production Projects Spells Disaster for Efficacy of OPEC Cutbacks

Another blow to the credibility of the Organization of the Petroleum Exporting Countries' (OPEC) oil production cutback initiative has been dealt by Goldman Sachs, and it might prove to be the knockout punch: the bank says the next two years will see the biggest ever increase in oil and gas development in non-OPEC nations.

The news comes amid growing consensus that OPEC's cutbacks, while remarkable in terms of compliance, cannot possibly dent the huge global glut and bring about a lasting market rebalance.

It's also questionable over the long term if rising global demand - the rate of which varies greatly depending on the source, and which OPEC has repeatedly said will ensure the success of the cutbacks - will be enough to absorb the expected increase in production.

In a note, Goldman Sachs analysts write, "Our database of the industry's new oil & gas developments shows that 2017-19 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex (capital expenditure) commitment yields fruit."

They add, "A key unknown is how well the industry will delivery (on the projects) ... the industry has been poor at delivering historically, but has much improved in the last three years."

The bank believes the new production projects and the U.S. shale boom could add 1 million barrels per day (bpd) to overall global output in coming years.

Goldman Sachs also suggests OPEC has now been relegated to the role of inventory manager rather than price setter: "OPEC's decision in November 2016 to cut production was rational, in our view, and fit into its role of inventory manager of last resort.

"However, the unintended consequence was to underwrite shale activity through a bullish credit market at a time when delayed delivery of the 2011-13 capital spending boom could lead to record non-OPEC production growth in 2018."

Ole Hansen, head of commodity strategy at Saxo Bank, has an even lower opinion of OPEC's standing: he told Reuters, "OPEC has used up most of its arsenal of verbal weapons to support the market; one hundred percent compliance by all is the only tool they have left and on that account they are struggling."

To which U.S. bank Jefferies said in a note, "OPEC's market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience."

What all this could mean in the short term was made clear by Jim Ritterbusch, president of Ritterbusch & Associates, who said in a note and in reference to the Energy Information Administration reporting that U.S. inventories climbed almost 5 million barrels to 533.1 million last week, "The fact that this supply has increased almost 55 million barrels this year in the face of significant OPEC production cuts is evolving as a major bearish development that poses a significant threat to the viability of the OPEC agreement."

While some analysts still believe an extension of the OPEC cutbacks to the end of this year could help in rebalancing the market, Commerzbank earlier this week stated in a note that it would be unwise for investors to "pin their hopes" on an extension, pointing out that "it is very unlikely that Russia will actively take part in any extension of the production cuts that goes beyond paying lip service to the agreement."