IEA Warns Of An Oil Supply Crunch – Despite 2017 Shale Investment

//IEA Warns Of An Oil Supply Crunch – Despite 2017 Shale Investment

IEA Warns Of An Oil Supply Crunch – Despite 2017 Shale Investment

IEA Warns Of A Supply Crunch Despite Shale Investment

The IEA is forecasting a modest oil price recovery in 2017, supported by increased global demand. The agency’s numbers indicate that oil supply should be adequate for the next few years. However, it is now unclear whether enough new projects will enter the pipeline over this period to avoid a supply crunch. The oil market could face a shortage around 2020.

In November 2016, after several months of negotiation, OPEC and other oil-producing nations agreed to a significant cut in their collective output – driving the oil price from a February low point of below $30/barrel to over $50 at the beginning of 2017.

In the short term, the rise in prices has motivated oil producers outside the cartel, especially US-based shale companies, to increase their production. A large increase in shale oil production is positive for the wider US economy, and some analysts believe President Donald Trump’s administration could support additional policies that boost US production further. The number of US operational oil rigs has increased every month since May 2016, with more additions in December 2016 than any month since early 2014. We’ve also seen record-high prices for land in Texas and surrounding states, as companies move operations onshore. This has included a $6bn purchase by Exxon.

Market Dynamics To 2022

However, over the medium-term, the dynamics of oil pricing have now become more complicated. Whereas last year, the price was largely dependent on the perceived likelihood of an OPEC deal, the focus has now shifted to whether countries will stick to their promises of production cuts. There is also a trade-off between how quickly US production increases (pushing down the oil price) and the improved economic growth which would occur as a result, as this should raise overall demand for oil (a positive for the price).

The IEA has warned that by 2020, the market will be exposed to a surge in prices. This will be due to a shortfall in supply, as a direct result of the oil price crash, which forced O&G companies to cut investment by around a quarter (in 2015 and 2016). More investment in O&G E&P is crucial to guarantee future supplies, in order to meet this growing demand. According to the IEA, this lack of investment in longer-term projects could increase market volatility. Demand for OPEC crude is expected to rise from 32.2m b/day in 2016 to 35.8m b/d in 2022. The amount of spare oil on hand to meet a crisis will drop below 2m b/d.

The IEA warns that the shale industry alone will not be able to meet growing demand, despite new projects coming online. US shale drillers saw cost reductions of 30% in 2015 and 22% in 2016, allowing them to raise production in a low price environment. However, the upside to production has limits. Meanwhile, the supermajors are also looking at short-term returns. ExxonMobil has dedicated half of its O&G production investment spend into “short-cycle” projects (including shale).

The Impact Of New Tech

On a wider view, governments are pushing harder for energy efficiencies, cleaner fuel usage and electric cars. By 2022, around 15m electric vehicles are expected to be operational (from a 2015 base of 1.3m). Vehicle efficiency standards also becoming stricter, with mandatory regulations for fuel economy now covering c. 3/4 of passenger vehicle sales globally. This is having a significant impact on oil consumption.

However, while the IEA sees oil demand growth slowing, it does not see it reversing. These vehicles and regulation changes are expected to replace c200k b/d of demand over the coming five years. As global growth accelerates, world oil demand is expected to grow on average by 1.2m b/d each year to 2022. The question is: will supply keep up?

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IEA Warns Of An Oil Supply Crunch - Despite 2017 Shale Investment - Energyfin
Article Name
IEA Warns Of An Oil Supply Crunch - Despite 2017 Shale Investment - Energyfin
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The IEA is forecasting a modest oil price recovery in 2017, but a thin project pipeline means the oil market could face a supply crunch (shortage) by 2020.
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Energyfin
By | 2017-03-16T15:12:47+00:00 March 7th, 2017|Categories: Articles|Tags: , , |0 Comments

About the Author:

Charles Webb is a Senior Consultant at Energyfin.

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