A Looming Supply Glut Could Undermine the Offshore Oil Boom

Offshore oil is back in a big way. After years of costly offshore oil contacts being put on ice due to lower-than-ideal oil prices and uncertain future demand, these projects have been roaring back to life around the world.

But the future of the sector remains uncertain as a looming oil glut may be scaring off would-be investors.

The last few years have seen a boom of offshore oil projects across the US, Brazil, and Guyana, with some growth in Africa and Asia as well. As a result, the floating oil rig business has gone gangbusters, with the average day rate soaring by more than 40% since the beginning of 2022. And a lot of those rigs are fully booked out, despite the fact that those blistering prices can account for “between 20 per cent and 40 per cent of the cost of developing an oilfield” according to recent reporting from the Financial Times.

While rig prices are still sky-high, however, they are just beginning what could be a protracted fall, driven by fears of an impending oil glut. This signals a much bigger trend in the global energy industry, with rig prices serving the canary in the proverbial coal mine for the oil industry as a whole. “The worries have seen the share prices of some leading rig operators fall nearly 30 per cent in the last year, despite the current boom,” the Financial Times states.

Just last month, the World Bank dropped a bombshell projection in its latest Commodity Markets Outlook report, stating that we’re headed straight for a historic supply-demand gap in oil markets of a magnitude that has only been seen twice since the birth of the oil industry in the mid-1800s. “Next year, the global oil supply is expected to exceed demand by an average of 1.2 million barrels per day,” World Bank stated in its latest Commodity Markets Outlook report.

The deepwater drilling boom has played a major part in this trend. At the same time that global oil demand growth is projected to fall, significant supplies from producers such as the US, Brazil, Canada and Guyana are just about to hit the very nearly saturated market. But the recent boom in deepwater drilling is just one factor that has led up to what industry experts are now all but certain will be a significant and enduring oil glut over the next decade. The oversupply is being driven by a number of overlapping market factors including flatlined economic growth in China, high projections for growth of electric vehicles sales, increasing adoption of trucks powered by liquefied natural gas rather than oil-derived gasoline, and expected boosts in production from non-OPEC+ nations on top of continued overproduction from OPEC+ members as well.

The Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+ have been churning out a surplus 7 million barrels each and every day, the equivalent of “almost double the amount on the eve of the pandemic in 2019,” according to a World Bank blog post accompanying the bombshell report. While OPEC+ is generally quick to make production cuts to keep oil prices high, the World Bank says there is cause for concern that the current level of overproduction is likely to remain static in the near-term.

One likely result of this huge market swing is that a barrel of oil could cost less than $60 by 2030, which would be sure to have sweeping consequences for global economics and trade patterns.

Some of these outcomes will be welcome to consumers in developed countries, who will likely feel relief at the gas pumps and in the grocery stores. But the outlook is grim for oil and gas companies, who can expect a decade of uncertainty, volatility, and likely declining revenues.