The IEA’s latest report on the outlook of the oil market for the 2021 time horizon contains all the necessary ingredients to heighten the bafflement of big exporting countries.
Paris-based Petrostrategies consulting firm analyses International Energy Agency’s (IEA) latest report on the outlook of oil market for the 2021 time horizon. The IEA tells them that unless major unforeseen changes occur (notably geopolitical ones), “only in 2017 we will finally see oil supply and demand aligned”.
The IEA’s latest report on the outlook of the oil market for the 2021 time horizon contains all the necessary ingredients to heighten the bafflement of big exporting countries. Over the last few weeks, the latter have been looking to stop the price fall in its tracks, the scale of which they had clearly not expected, as they had not foreseen the gritty resilience of shale oil producers in the US. The IEA tells them that unless major unforeseen changes occur (notably geopolitical ones), “only in 2017 we will finally see oil supply and demand aligned”. And even then, this rebalancing and the rate at which prices rebound will be “wasted” by the “enormous stocks being accumulated” in recent years. After reaching an equilibrium, the market will begin to draw on these stocks, says the IEA in its Medium-Term Oil Market Outlook, which was published last week in Paris.
In an introductory note, the agency points to the “enormous complexity” of the current situation where, for the first time since the pioneering days of the oil industry, “we are living in perhaps the first truly free oil market”. On this market “anyone who can produce oil sells as much as possible for whatever price can be achieved”. The certainties are no longer so certain where the impact of low prices on demand is concerned, on high-cost productions or on the attitude “of the biggest group of oil producing countries to lower output in order to stabilize prices”. The IEA states “that today’s oil market conditions do not suggest that prices can recover sharply in the immediate future”.
The report highlights the extraordinary technical innovations accomplished by expensive oil producers. Thus, if US light tight oil (LTO) falls by 600,000 b/d in 2016 and by a further 200,000 b/d in 2017, it could thereafter embark on a gradual recovery thanks to a rebound in prices and “further improvements in operational efficiencies and cost cutting”. Furthermore, “anybody who believes that we have seen the last of rising LTO production in the US should think again; by the end of our forecast in 2021, total US liquids production will have increased by a net 1.3 million b/d compared to 2015”, writes the IEA. “Although we are currently seeing major cutbacks in oil investments, there is no doubt that many projects currently on hold will be re-evaluated and will see the light of day at lower costs than were thought possible just a few years ago”.
OPEC’s oil revenues, which peaked at $1,200 billion in 2012, fell to $500 billion in 2015 and, if prices remain at their current levels, these revenues will fall to around $320 billion in 2016.
Yet the agency of consumer countries is very concerned about the drop in investments: -24% posted in 2015 and -17% expected in 2016. The world risks a shortage in production capacities. “The risk of a sharp price rise towards the later part of our forecast arising from insufficient investment is as potentially de-stabilizing as the sharp oil price fall has proved to be”. The IEA is forecasting an average annual increase of 1.2 million b/d in global oil demand by 2021, i.e. a very solid outlook in historical terms”. As a result, demand is going to exceed 100 million b/d in 2019 or 2020. If investments do not pick up, it will be very difficult to meet this demand.
And as if all this bad news were not enough to completely sap the morale of oil exporters, the IEA points out that OPEC’s oil revenues, which peaked at $1,200 billion in 2012, fell to $500 billion in 2015 and, if prices remain at their current levels, these revenues will fall to around $320 billion in 2016. One could be forgiven for wondering what exactly all the fuss was about.
