The U.S. will supply much of the world’s additional oil for the next few years, according to a new report from the International Energy Agency (IEA).

Over the next three years, the U.S. will cover 80 percent of the world’s demand growth, the IEA says in its newly-released Oil 2018 annual report. Canada, Brazil and Norway will cover the remainder, leaving no room for more OPEC supply.

The irony is that the substantial gains in output from shale will only be possible because of the OPEC cuts, which has tightened the market and boosted prices. This fact is not lost on OPEC producers. "If you are a shale oil producer, who brought you back? It was OPEC," the UAE’s oil minister Suhail Al Mazrouei, said at a recent industry conference, according to Bloomberg. "Without OPEC there’d be chaos in the market."

Indeed, the IEA’s new report paints a pretty gloomy picture for OPEC members, who are hoping to phase out their supply cuts after this year. With non-OPEC supply rising quickly, particularly in the U.S., OPEC may struggle to figure out a way to increase output without pushing down prices, according to the IEA’s analysis.

That could put pressure on the cartel to keep the production cuts in place for longer than they had wanted, although it seems hard to imagine they maintain the production ceilings for another three or four years. Doing so would mean handicapping themselves and ceding even more market share to U.S. shale and other non-OPEC producers. Still, it is unclear how this plays out – returning to full production, even if phased in gradually, presents its own problems, if the IEA’s forecast is accurate. Related: China Is Single-Handedly Solving The Gas Glut

The IEA sees demand for OPEC oil actually declining in absolute terms over the next few years as it is edged out of the market by non-OPEC supply. OPEC production only grows by 750,000 bpd through 2023 under the energy agency’s forecast, although that also takes into account a 700,000-bpd decline in Venezuela.

The bottom line is that the IEA sees oil demand rising by 6.9 million barrels per day (mb/d) by 2023, with more than half of those increases coming from China and India. Meanwhile, supply grows by about 6.4 mb/d, with a whopping 3.7 mb/d coming from the U.S., nearly 60 percent of the total global supply increase.

By sector, petrochemicals starts to take on a larger role in driving oil demand, especially as the transportation sector starts to see a greater adoption of electric vehicles. But it isn’t just EVs – abundant oil and cheap natural gas are fueling a surge in petrochemical investments.

Nevertheless, while the IEA sees an explosion of shale output for the next five years or so, beyond that the story is different. The massive cuts to upstream investment since the collapse of oil prices in 2014 will begin to cause supply problems at the beginning of the next decade. Spending levels are only now starting to pick up, but are still at a fraction of pre-2014 levels, which means that there will be a dearth of new, large-scale conventional oil projects in several years’ time. “This is potentially storing up trouble for the future,” the IEA wrote in its report.

Moreover, natural depletion from existing fields essentially wipes out 3 mb/d of supply every year. That, combined with demand growth, means that the oil industry needs to replace “one North Sea each year,” the IEA says. But the industry is no longer spending enough to cover that gap. In 2017, new oil discoveries fell to another record low, with less than 4 billion barrels of oil equivalent found. The lack of new oil in the works is sowing the seeds of supply problems in the 2020s.

Related: Can Russia & China Rescue Venezuela?

“The United States is set to put its stamp on global oil markets for the next five years,” Fatih Birol, the IEA’s Executive Director, said in a statement. “But as we’ve highlighted repeatedly, the weak global investment picture remains a source of concern. More investments will be needed to make up for declining oil fields – the world needs to replace 3 mb/d of declines each year, the equivalent of the North Sea – while also meeting robust demand growth.”

The IEA report will provide a fascinating backdrop to the start of the annual CERAWeek conference in Houston, where industry titans and oil ministers will gather this week. No doubt the aggressive forecast for U.S. shale will provide a lot of fodder for conversation for both shale boosters and anxious OPEC representatives.

By Nick Cunningham of Oilprice.com

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