A sense of calm returned to the energy complex yesterday following the pandemonium of previous sessions. Market players breathed a sigh of relief as the US and Iran backed away from further confrontation. The de-escalation came as both sides emerged from their latest skirmish feeling that they gained the upper hand. Washington will claim victory for killing Iran’s most powerful military commander. Tehran, meanwhile, will be satisfied that its retaliatory strikes on US assets maintain the narrative of strength for the Iranian people.

Hostilities may have ended for the time being, but the longer-term risks of conflict have by no means vanished. Cue a flurry of belligerent Iranian rhetoric. A commander from Iran’s Revolutionary Guards made fresh threats, warning of “harsher revenge soon”. Moreover, another senior Iranian military official said this week’s missile attacks on US targets were the start of a series of attacks. Such claims may be typical Iranian hyperbole, but it suggests that its strategy of spreading influence in the region and stoking anti-American sentiment remains intact. Set against this backdrop, the threat of supply disruptions in the Middle East is very much alive.

For now though, the receding prospect of war snuffed out the geopolitical risk premium leaving oil struggling for upside. Buying pressures were further dampened by the negative afterglow of a bearish EIA stock report. The result was that both crude markers were barely changed yesterday. Prices are below the level seen prior to the killing Soleimani. This lull in volatility is a welcome reprieve from what has been a blistering start to the year. Nevertheless, history has taught us that this fragile calm should not be taken for granted.

Making way for new blood

There are no prizes for guessing the single biggest factor that has reshaped global oil markets in recent years. The US shale boom has dominated the supply side of the oil equation and in doing so has accounted for virtually all recent non-OPEC supply growth. Yet as it closes out a golden decade, a new one has begun on a softer footing. The fact is that the poster boy for non-OPEC supply has lost some of its oomph. Simply put, US crude production is slowing. US total oil production growth is expected to slow from 1.6 mbpd last year to 1.1 mbpd in 2020, according to the IEA. US shale producers are scaling back activity amid increasing shareholder pressure for financial discipline. Spending plans have subsequently been slashed which in turn has undermined drilling activity and the production outlook.

But just as the US shale engine shifts down a gear, other producers from outside the oil cartel are pumping with unprecedented vigour. A prime example is Norway. According to the IEA, the country’s oil production has declined every year since 2016 but is forecast to grow by 390,000 bpd in 2020. At the heart of this improving outlook is one megaproject: the Johan Sverdrup oil field. One of the largest finds anywhere in recent years, it came online last October and is currently producing 350,000 bpd. Latest figures show that total crude output averaged 1.71 mbpd in November compared to 1.47 mbpd in October. The ramping up of the giant Johan Sverdrup not only represents a boon for Norway’s oil industry but also for the wider mature North Sea Basin. Specifically, it shows that there is still life in the old dog yet. Looking ahead, the oil field is expected to underpin Norway’s production growth for the foreseeable future. Output is forecast to hit Phase 1 capacity of 440,000 bpd this summer before reaching 660,000 bpd by 2022.

Also leading the charge for non-OPEC supply growth is Brazil. The country’s oil output topped 3 mbpd for the first time last November, reaching a record 3.09 mbpd. This surge in production owes much to the fruition of past investments. Indeed, previous governments went to great lengths to open the sector and allow for more private investments. Now though, further production gains will depend on foreign investors putting up the huge capital needed to develop its offshore presalt plays. The long-term production growth outlook was dealt a blow in November after an auction to develop four deep-sea oil fields turned out to be a major disappointment. Nevertheless, near-term growth prospects remain healthy. Brazilian output growth is forecast at 310,000 bpd in 2020, according to the IEA, almost double the 160,000 bpd seen last year.

Another driving force behind non-OPEC supply growth is Russia. This may come as a surprise given that it is a key member of the OPEC+ deal to curb production. Yet far from cutting supply, Russia has got into the habit of exceeding its quota. Russian companies have long complained at production cuts, claiming that they undermine expansion plans. Small wonder then that Russia’s crude and condensate production hit a record high for the post-Soviet era in 2019. The non-OPEC heavyweight pumped 11.25 mbpd, up from 11.16 mbpd in 2018. There is no reason to think that this year will be any different. In fact, the country’s energy minister recently suggested that restrictions on production may be abandoned later this year. Russian oil production should therefore at the very least hold steady at record levels in 2020.

Alongside this trifecta of gung-ho oil producers, there are other non-OPEC nations also bracing for fresh production gains. Among them is Canada. The rate of production growth is projected to accelerate to 160,000 bpd this year, according to the IEA. Meanwhile, Mexico is also expected to contribute as its long-running production decline stabilises. Output has been trending lower since 2004 but is poised to jump by 60,000 bpd in 2020. The upshot is that total non-OPEC supply growth is expected to increase by 2.1 mbpd this year from 1.9 mbpd in 2019. This is the strongest rate of expansion in 15 years by some estimates. In short, it’s no longer US shale but other rival producers that risk becoming OPEC’s next big headache.