December 2017 Exclusive Story
Operators Lock In 2018 Oil Hedges
PARIS–While oversupply has been the primary concern in global oil markets the past three years, the situation could change dramatically over the next few years. In a medium-term oil market forecast released on March 6, the International Energy Agency says oil supply could struggle to keep pace with growing demand after 2020, potentially leading to sharp price increases, unless new exploration, production and development projects are approved soon.
“This year marks a new period of oil market management by leading oil producers who put together in late 2016 the most comprehensive agreement to limit oil output seen since 2009,” EIA states. “The reason was to ensure that oil prices were stabilized to avoid economic dislocation in producing countries and provide a platform for gradual growth. The agreement brought to an end a two-year free-market window where producers competed to secure outlets for their oil.”
The agency says the agreement among both OPEC and non-OPEC producing nations provides the backdrop to the medium-range forecast, providing clear trends to guide its view of what it describes as a “transformative period in the history of oil” over the next five years.
The key findings of the report include the projection that oil demand will grow strongly through at least 2022, with India, China and other developing economies leading the way. The increasing demand, combined with reduced investments in new oil production projects to support supply, will begin having a material impact on the supply/demand balance within the next few years, IEA suggests.
“The need for more production capacity becomes apparent by the end of the decade, even if supply appears plentiful today,” the report reads. “It is not clear that upstream projects will be completed in time given the unprecedented two-year fall in investments in 2015 and 2016, although major reductions in costs will help.”
The global supply and demand picture appears balanced over the short term, but IEA’s forecast of sustained demand growth and faltering supply over the intermediate term could have a pronounced impact on oil prices by 2020, the agency reports. In fact, the medium-term trends indicate not only higher prices, but the risk of prices rising significantly if the world’s spare production cushion is eroded post-2020, IEA predicts.
Tight Global Market
While investments in U.S. shale and tight oil plays are picking up, the agency says indications of 2017 global capital spending plans are not encouraging, adding that oil supply growth will begin stalling if the investment slump that began in 2015 is not reversed. “Demand and supply trends point to a tight global oil market, with spare production capacity in 2022 falling to a 14-year low,” IEA cautions.
The supply and demand trends in the medium-term report were already evident in IEA’s monthly Oil Market Report issued in February. Supported by strong fourth-quarter numbers, the agency says it revised its estimated 2016 global oil demand growth higher for the third consecutive month, to 1.6 million bbl/d. Meantime, with 90 percent compliance to the OPEC-led production agreement, it says global oil supplies fell nearly 1.5 million barrels a day in January, with both OPEC and non-OPEC countries producing less.
Noting that global oil demand had increased nearly 7 million bbl/d between the first quarter of 2013 and fourth quarter of 2016, IEA projections show demand continuing on a similar course over the coming five years, surpassing the symbolic threshold of 100 million bbl/d in 2019 and reaching 104 million bbl/d by 2022. It says developing countries will drive nearly all of the growth, accounting for seven of every 10 extra barrels consumed globally in 2022. Demand growth in India is forecast to outpace Chinese growth by 2022.
“We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go,” remarks IEA Executive Director Fatih Birol. “But this is no time for complacency. We do not see a peak in oil demand any time soon. And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”
The largest contribution to new oil supplies will come from the United States, with IEA expecting U.S. light tight oil production to make a strong comeback and grow by 1.4 million bbl/d by 2022 at a $60/bbl price. The agency notes that its expectations for U.S. light tight oil are higher than in its 2016 forecast thanks to the impressive productivity gains made in these plays over the past year.
“The United States will respond more rapidly to price signals than other producers,” IEA holds. “If prices climb to $80/bbl, U.S. light tight oil production could grow by 3 million bbl/d within five years. Alternatively, if prices are at $50/bbl, it could decline from the early 2020s.”
Within OPEC, the bulk of new supplies will come from low-cost Middle East producers, namely Iraq, Iran and the United Arab Emirates, according to IEA. Production from Russia is forecast to remain stable over the next five years, with Nigeria, Algeria, Venezuela and others seeing their oil outputs decline.
The report also highlights changes in international oil trade flows and investments in storage infrastructure. “Asia will need to look beyond the Middle East to meet its growing import requirements . . . with OPEC countries focused on boosting domestic refining capacity to meet local demand and ramp up exports of refined products,” IEA concludes.