The Slide in Supply: Why Oil Supply is Lower than You Think


When the coronavirus pandemic destroyed global crude oil demand, supply was slow to respond until dramatic actions were taken. Now, with demand picking up at a rapid rate, supply is again being outpaced by its counterpart drawing down crude oil inventories around the world. While global forecasting agencies and oil companies alike predict slow demand growth to pre-pandemic levels, the supply picture will continue to lag behind well into the foreseeable future. 

Key Points

  • Global production fell from an average 101.7 MMBPD in Q4 2019 to almost a 90 MMBPD average in Q1 2020.

  • OPEC+ agreed to cut 2020 output by 9.7 MMBPD in May through July, 7.7 MMBPD from August through December, and 5.8 MMBPD through April 2022. So far compliance has been 106%, 94%, and 101% for the months of June, July, and August, respectively.

  • Due to sanctions, socio-political turmoil, and restricted capital for investment in producing assets, Venezuela and Libya have seen major declines in oil production and exports in 2020. Venezuela will likely remain producing 0.5 MMBPD less than in 2019 while Libya is still nearly 1.0 MMBPD below 2019 levels.

  • U.S. production has fallen from 13 MMBPD to 10.7 MMBPD since April. The EIA expects crude production to average slightly less than 11.0 MMBPD for the first half of 2021.

  • Global liquid fuels production averaged 91.5 MMBPD in August while consumption averaged 94.3 MMBPD. Demand already outpaces supply. With average demand estimated at 99.1 MMBPD for 2021, proposed OPEC+ cuts plus the decline in U.S. production will result in global production averaging 93.9 MMBPD, a further supply imbalance. 


COVID-19 destroyed global crude oil demand at a time when the world was producing record amounts of oil. As a result, global crude oil storage began to fill at a rapid pace. This forced producers around the world to bring 12 MMBPD of crude oil production off the market at the peak of demand destruction in order to balance the glut in global storage. Now, as crude stocks have begun to drop, the world must start bringing the oil initially held off the market back online. Luckily, crude oil production is not as simple as turning a nozzle and expecting an immediate production increase. Because of this lag, global production will not be able to keep up with growing global demand. On the supply side, geopolitics remain a wild card. Even if global demand returns to pre-pandemic levels by the end of the year, it will take significantly longer for global supply to re-balance due to the geopolitical influence on the world’s most important commodity. 

Pre-Pandemic Supply 

In the fourth quarter of 2019, just months before society was completely upended by the global pandemic, global production averaged 101.73 MMBPD, which was 700 thousand barrels shy of the highest average on record one year prior [1]. A few months later, that average was closer to ninety million barrels per day as global producers came together in an attempt to curb the out of control supply and demand imbalance. By the end of Q1 2020, global supply went from nearly record highs to lows not seen in the past decade.

OPEC+ Cuts

Back in April, the members of the Organization of the Petroleum Exporting Countries along with their allies, a group dubbed OPEC+, held a meeting to discuss actions to cut production. The meeting “reaffirmed the continued commitment of the participating producing countries in the ‘Declaration of Cooperation’ (DoC) to a stable market, the mutual interest of producing nations, the efficient, economic and secure supply to consumers, and a fair return on invested capital” [2]. It is ironic this statement was included since the exact opposite seems to be what started a price war that, combined with the global pandemic, sent oil markets into a tailspin. Nonetheless, the meeting was a commitment from producers in the OPEC+ group to stabilize energy markets while acknowledging the importance of international cooperation to ensure the resilience of the energy industry. Members came to the agreement to cut overall crude oil production by 9.7 MMBPD for May and June, and from July through the end of 2020 cut production by 7.7 MMBPD. Moving forward they plan to cut production by 5.8 MMBPD from January 2021 through the end of April 2022 [2]. Therefore, nearly 6 MMBPD of global production is set to remain offline throughout 2022 and thus far members have been holding up their end of the deal. 

Figure 1: Proposed May and June OPEC+ Production Cuts [15]

While participants had nearly a month to prepare for the historic cuts, compliance in May was unsatisfactory for the leaders of the group, many of whom pledged additional cuts to support the global supply/demand imbalance. With overall compliance a mere 85% in May, OPEC members Iraq, Nigeria and Angola, along with non-OPEC participant Kazakhstan were publicly called out by their counterparts for their overproduction, thus hampering the groups target [3]. In June OPEC produced 22.31 MMBPD, the organization’s lowest collective output since September 1990 when the launch of the first Gulf War nearly wiped out crude oil production in Iraq and Kuwait [4]. As a result, OPEC+ was in 106% compliance of its committed production cuts for the month with Saudi Arabia, Kuwait, and UAE leading the charge from their additional cuts. On June 6, OPEC and its allies agreed to continue their current production cuts through July due to ongoing demand concerns, yet output rose dramatically in July as Saudi Arabia and other Gulf members ended their voluntary extra supply curbs [5]. July’s increase was the biggest since April when OPEC briefly pumped at will before the latest supply cut was agreed, but due to geopolitical issues and overperformers the group was still in 94% compliance [5]. August saw a relief in output cuts and the United Arab Emirates emerged as a major laggard in delivering their agreed upon oil reductions. While Iraq, Nigeria, Angola and Kazakhstan have come under intense scrutiny from their OPEC+ counterparts for excess output, the four’s significantly improved performance helped the group maintain 101% compliance through August [6]. Thanks to many members of the OPEC+ group overperforming on the agreed upon cuts, the group has managed to maintain nearly perfect compliance on historic production cuts that have helped bring global supply and demand back into balance. 

Venezuela’s Oil Problem

Venezuela, once considered one of Latin America’s most prosperous countries and a member of the OPEC group, was the world’s 11th biggest oil producer in 2019 [7]. But years of economic mismanagement, cronyism, and corruption have sparked a monumental economic collapse which saw the oil rich country become one of the poorest in South America. These signs point to Venezuela being on the verge of becoming a failed state. As a result of the current social and political turmoil in the area, the OPEC deal exempts the country from its pledged production cuts. On a surface level, the move seems surprising since Venezuela has the largest oil reserves of any country in the world and has historically been a production powerhouse. Investigating recent current events uncovers the move was meant to save a struggling country. 

The oil rich Latin American country’s once mighty petroleum industry was long ago responsible for producing a tenth the world’s oil, almost all export income, and a significant portion of the country’s GDP. These accolades have virtually collapsed. This was initially triggered by the oil price collapse beginning in mid-2014 as global supply expanded rapidly because of booming U.S. production, waning geopolitical risks, and growing OPEC oil output [7]. By 2016, as oil prices weakened further and Venezuela’s economic crisis snowballed, vital spending on crucial maintenance of oil infrastructure and operations plunged which brought the economy with it. The situation has become so severe that the IMF predicts Venezuela’s GDP will contract by 15% during 2020 and shrink another 5% in 2021 [7]. Three key reasons for this rapid disintegration are the collapse of Venezuela’s economically vital petroleum industry, sharply lower oil prices, and progressively more severe U.S. sanctions [7]. Figure 2 shows the country’s rapid decline in oil production volumes from the beginning of 2019 to the middle of 2020.

Figure 2: Venezuela’s Declining Crude Oil Production [7] 

Current U.S. sanctions aimed at defunding the corrupt government are preventing offshore oil majors from operating in Venezuela and inhibiting the country from selling its oil abroad. This restricts President Maduro’s regime from accessing urgently needed capital to repair and maintain vital oil infrastructure as well as perform the necessary development activities to maintain oil production [7]. In fact, Baker Hughes rig data showed zero active rigs in the country in July, the same month Venezuela produced a daily average of 339,000 barrels of crude per day compared to 755,000 a year earlier and almost one seventh from a decade earlier [7]. This essentially signals the death for Venezuela’s economically crucial but stricken petroleum industry, especially when analysts predict Venezuela’s oil production could fall to zero by 2021. With no plan in place to bring oil production back to pre-2014 or even pre-pandemic levels, another 0.5 MMBPD of production will be left off the table for the foreseeable future. 

Libya In Crisis

Similar to the situation in Venezuela, the oil industry in Libya has been on the verge of collapse for years. Libya’s oil industry has been crumbling after more than nine years of neglected maintenance amid a civil war that’s killed thousands and destroyed towns across the country. Similar to OPEC member Venezuela, Libya was also exempt from the group’s production cuts due to socio-political turmoil that has rocked the country.  Despite having Africa’s largest crude reserves, the lack of basic servicing has left pipelines corroding and storage tanks collapsing. Remedial work at wells alone could cost more than $100 million, and that’s money the government can ill afford [8]. Libyan output has plunged since January due to a blockade of ports and fields by groups loyal to eastern-based commander Khalifa Haftar. As a result, Libya’s production has dropped from 1.186 MMBPD last November to 796,000 BPD in January 2020 before slipping to 82,000 BPD in June, according to OPEC’s Monthly Oil Market Report [8]. While Libya had planned to increase production to 2.1 MMBPD by 2024, those plans are now in jeopardy due to recent skirmishes entangling the country’s oil facilities and wealth with General Haftar’s Libyan National Army, which controls the oil, and the Turkish-backed Government of National Accord, which controls oil revenues [9]. 

Figure 3: Top Portion of the Official Announcement From the Libyan NOC to Restart Production (Translation) From Facebook [16]

On September 21st, the National Oil Company (NOC) released information on Facebook announcing it was set to return 260,000 BPD to the market the following week. This is a value 2.5 times larger than August’s average production and up nearly 100,000 BPD from before the blockade of its oil ports and oilfields was lifted the week prior [10]. While this is welcome news for a country desperately needing oil revenue to support their economy, it comes across as skeptical. Not only was the announcement made on Facebook, but the NOC noted it will only restart production at “safe” fields and exports from “safe” ports [10]. The reason Libya’s production fell so abruptly during the pandemic was due to occupation by armed groups aimed at eliminating oil production and associated revenues. It seems logical that as soon as production resumes, these areas will no longer be safe and will again become occupied by armed militias looking to control the government. For these reasons, the country nearly doubling production in the next week and maintaining stable output seems like a bit of a pipe dream. Either way, while production may increase to 260,000 BPD at the beginning of October, this number is still nearly a million barrels shy of the daily production in Q4 2019, meaning yet another country is far behind its pre-pandemic production levels. 

Domestic Production 

Unsurprisingly, production in the United States has been on the decline since the first quarter of 2020. This is mainly from scrapped capital programs and curtailed production due to reduced oil prices. The first quarter of 2020 saw the highest output of oil production in United States history hitting 13 MMBPD for three months. As prices began to tank, producers started curtailing production since the cost to produce was simply uneconomic at those price levels. In the four months from the beginning of April to the beginning of August domestic production fell from 13 MMBPD to 10.7 MMBPD [11]. With prices recovering to the mid-forty dollar range, production in the United States began to slowly creep back up. That is until Hurricane Laura forced Gulf of Mexico producers to shut in about 1.55 MMBPD resulting in a drop in domestic production to 9.7 MMBPD for the first time since 2018 [12]. Since that minor setback, U.S. production is back up to levels seen at the beginning of August regardless of the multitude of hurricanes that have swept through the Gulf. 

Figure 4: Weekly U.S. Domestic Production 1983-2020 [17]

During the height of the downturn in May, rigs and completion crews dwindled quickly. It is estimated completion crews fell over 85% while the rig count dropped 60% in just three months [13]. That disconnect exacerbated an already large accumulation of drilled, uncompleted (DUC) wells as domestic E&Ps waited for higher prices before completing wells and turning them to sales. Operator opinions vary on the required price deck to initiate a DUC drawdown, with some alluding to $50/bbl WTI while others were confident at $30/bbl [13]. If a company doesn’t have any rig contracts, it is cheaper to complete a previously drilled DUC than drill and complete the entire well. Within the next few months domestic production should rise a substantial amount due to the DUC inventory that was drawn down when prices stabilized in the mid-forty range during July and August. Since it takes time to complete and bring the wells online, the associated production influence will not be seen for another few weeks but the eventual production uptick will be clear. It is possible the recent price cuts implemented by Saudi Arabia are also an attempt to depress prices until U.S. oil hedges roll off many producers at the end of 2020. This would further reduce economics on both new drilling and completing DUCs in 2021. Although the recent price drop has hampered activity and stalled the falling DUC counts, once prices recover the count should again decline. 

Figure 5: United States DUC Inventory [14] 

Production has also risen as tight oil operators have brought wells back online in response to rising prices after curtailing production during low oil prices in the second quarter. The EIA expects production to rise to 11.2 MMBPD in September as Gulf of Mexico production resumes and more DUCs come online [1]. However after September, the EIA expects U.S. crude oil production to decline slightly, averaging just under 11.0 MMBPD during the first half of 2021 because experts predict new drilling activity will not generate enough production to offset declines from existing wells [1]. If drilling activity picks back up later in 2021, U.S. crude oil production is expected to surpass September levels sometime in the fourth quarter of 2021. With the annual average of U.S. crude oil production falling from 12.2 MMBPD in 2019 to 11.4 MMBPD in 2020, there is even more crude left in the ground at a time when demand is quickly outpacing supply [1].   


The EIA estimates that global liquid fuels production averaged 91.5 MMBPD in August, down 9.7 MMBPD year over year, largely reflecting voluntary production cuts by OPEC+ along with reductions in drilling activity and production curtailments in the United States [1]. Luckily, the EIA expects global production to rise significantly throughout 2021 to an annual average of 99.3 MMBPD [1]. Since global consumption averaged 94.3 MMBPD in August, is only down 8.2 MMBPD from a year prior, has increased from 93.3 MMBPD in July, and is forecasted to average 99.1 MBPD for all of 2021; demand is clearly expected to outpace supply for the foreseeable future [1]. Even though production in Libya is down a million barrels from the pre-pandemic baseline, Venezuela down another 0.5 million, and the United States down a million as well; it appears a return to consumption over 99 MMBPD in 2021 seems completely reasonable. Assuming OPEC+ follows its 5.8 MMBPD cuts until April 2022 and the U.S. averages 2 MMBPD less than its peak in 2019, these reductions from pre-pandemic production levels would result in 93.9 MMBPD. Other countries, especially those in OPEC+, will be able to make up for some lost global production through flush production in the first quarter of 2021, but supply will return to average production rates in H2 2021. If global production is ever to reach 102 MMBPD again, the contribution from the entire world will be needed. Without support from every producer including Libya, Venezuela, and the United States, that level will not be reached. 

Luckily the delay in global supply reaching its previous peak is driving down global storage inventories and ensuring stable prices into the future. Although likely to change, the current WTI crude futures strip is not showing prices above $43.25 through 2022 [18]. As more crude oil is demanded on a global scale, additional support from historic production powerhouses will be necessary. The top three oil producing countries: the United States, Saudi Arabia, and Russia will continue to constitute over a third of global supply. While the order may shift, as was seen with Russia recently taking the number two spot, they will remain the most stable and reliable sources of global crude oil. It is the bottom two thirds that will determine how much global supply will be readily available at a moment’s notice. Either way, the current total supply has now dropped below necessary demand and oil prices will need to start reflecting that shift to move the pendulum back into balance.





















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