An analysis of global oil markets conducted by Wood Mackenzie indicates that, following a period of structural oversupply, markets are “rebalancing” in a way that will support a steady recovery in prices to around $60/bl by the end of 2017.
More startlingly, however, the energy and commodity market intelligence provider is cautioning of a possible 20-million-barrel-a-day supply deficit by 2025, owing to the severe cutback in upstream investment and continued, albeit modest, demand growth.
Wood Mackenzie refining, chemicals and oil markets VP Alan Gelder reports that supply growth from outside of the Organisation of the Petroleum Exporting Countries (Opec) has started to respond to continued Opec supply, including the strong production increases from Iran and Iraq.
“US tight-oil production went from growing strongly to now showing year-on-year declines,” Gelder outlined in a recent presentation to the South African Petroleum Industry Organisation.
The upshot is that non-Opec supply, which continued to rise in 2015 despite increased Opec competition, will decline in 2016 and 2017, as companies seek to remain cash-flow neutral and sustain dividends by cutting costs and investment.
Wood Mackenzie expects the rebalancing to begin showing itself in the fourth quarter of 2016, when major refineries come back from maintenance and, in the absence of new supply, stocks begin to fall.
Gelder expects the oil price, which in the short term is likely to react strongly to news events and sentiment, to recover by the end of 2016 and, following a period of consolidation, begin moving towards the $60/bl-level by the end of next year.
In the longer term, however, Wood Mackenzie expects there to be continued demand growth, underpinned by emerging economies, that is unlikely to be met by supply growth, owing to the investment cuts being made upstream.
“We think upstream capital expenditure (capex) has been cut by about 40%,” Gelder says, arguing that capex in 2016 and 2017 is likely to be $400-billion less than was the case in 2014. “That cuts into future supply growth, because, with upstream, unless there is significant investment in operating fields, you get production declines.”
Therefore, Wood Mackenzie is forecasting a supply gap of over 20-million barrels a day by 2025 and a rise in prices to above $80/bl from around 2020, owing to the fact that many of the new projects will only be viable at prices of $80/bl or better. Gelder expects only part of the supply to be met from US tight oil and says there is also scope for conventional and deep-water projects.
“So we think, by 2020, we will be back to an oil-price world of $80/bl to $85/bl – quite a bit higher than where we are today.”