Production shortfall by 2020 could bring unprecedent oil price rises, IEA says

There is a risk for prices to rise more sharply by 2022 if the spare production cushion is eroded.

Eva González Houston (USA), 6 March, 2017

Global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices, unless new projects are approved soon, according to the latest five-year oil market forecast from the International Energy Agency (IEA).

The global picture seems comfortable for the next three years but supply growth slows considerably after that, according to Oil 2017, the IEA’s market analysis and forecast report. The demand and supply trends point to a tight global oil market, with spare production capacity in 2022 falling to a 14-year low.
That’s why the IEA report says there is a risk for prices to rise more sharply by 2022 if the spare production cushion is eroded.

The need for more production capacity will be felt by the end of the decade, even if supply seems more than enough today.
It is not clear that upstream projects will be completed in time given the unprecedented two-year fall in investment in 2015 and 2016 although major reductions in costs will help.

Fatih Birol (Executive Director, IEA). © IEA.

Fatih Birol (Executive Director, IEA). © IEA.

In the next few years, oil supply is growing in the United States, Canada, Brazil and elsewhere but this growth could stall by 2020 if the record two-year investment sudden fall in 2015 and 2016 is not reversed. While investments in the US shale play are picking up strongly, early signs of global spending for 2017 are not encouraging.

Developing countries to push global oil demand to the 104 mb/d by 2022

Developing countries account for all of the growth and Asia dominates, with about seven out of every 10 extra barrels consumed globally.

India’s oil demand growth will outpace that of China by then. While electric vehicles are an important factor for oil demand, the IEA foresees they will reduce only limited amounts of transportation fuel by 2022.

Largest contribution to new supplies by the USA

The largest contribution to new supplies will come from the United States. The IEA expects US light tight oil (LTO) production to make a strong comeback and grow by 1.4 mb/d by 2022 if prices remain around USD 60/bbl. Expectations for US LTO are higher than last year’s forecast thanks to impressive productivity gains.

“We are witnessing the start of a second wave of US supply growth, and its size will depend on where prices go,” said Dr Fatih Birol, the IEA’s Executive Director. “But this is no time for complacency. We don’t 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.”

Anyway the behavior of US production depends heavily on prices. The United States reacts more rapidly to price signals than other producers. If prices climb to USD 80/bbl, US LTO production could grow by 3 mb/d in five years. Alternatively, if prices are at USD 50/bbl, it could decline from the early 2020s.

Asian countries will need looking for suppliers different from Middle East

The report also highlights changes in international oil-trade flows and investments in storage infrastructure. Asia will need looking 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, additional crude oil exports from Brazil and Canada will be higher than those from the Middle East.

Within OPEC, the bulk of new supplies will come from major low-cost Middle Eastern producers, namely Iraq, Iran, and the United Arab Emirates. Others like Nigeria, Algeria and Venezuela will decline. Meanwhile, production from Russia is forecast to remain stable over the next five years.

Image over the headline.- © IEA.

Related external links:

IEA Market Report Series: Oil 2017

VOTE ARTICLE
Loading...Loading...
SHARE ARTICLE