If you believe the International Energy Agency (IEA), a new clique of nations is set to take over control of supply-and-demand balancing in the global oil market, supplanting the OPEC countries. Indeed, IEA maintains that record oil output from the U.S and three other nations will keep global markets well-supplied to 2023.
According to IEA’s latest annual report on oil markets, production growth from the U.S., Brazil, Canada and Norway will more than meet global oil demand growth through 2020. However, more investment will be needed to boost output after that. Up through 2020, gains from the U.S. will cover 80% of global demand growth, with Canada, Brazil and Norway covering the rest, says Oil 2018, the IEA’s five-year market analysis and forecast.
Investment concerns. Yet, the report finds that despite falling costs, additional investment will be needed to spur supply growth after 2020. IEA says that the oil industry has yet to recover from the unprecedented two-year drop in investment during 2015–2016, and the agency sees little-to-no increase in upstream spending outside of the U.S. in 2017 and 2018. On this latter point, this is where we at World Oil have to part company with IEA, as our own forecast for wells drilled outside the U.S. shows a 4.6% increase for 2018 (see World Oil, February 2018, p. 55).
“The United States is set to put its stamp on global oil markets for the next five years,” said IEA Executive Director, Dr. Fatih Birol, in releasing the report. “But as we’ve highlighted repeatedly, the weak global investment picture remains a source of concern. More investments will be needed to make up for declining oil fields—the world needs to replace 3 MMbpd of declines each year, the equivalent of the North Sea—while also meeting robust demand growth.”
IEA predicts that economic growth in Asia, and a resurgent petrochemical industry in the U.S. , will push global oil demand 6.9 MMbpd higher by 2023, to 104.7 MMbpd. China remains the main engine of demand growth, but more stringent policies to curb air pollution (if enforced) may slow growth. Interestingly (and despite the propaganda put out by Tesla and General Motors), IEA says that the increasing penetration of electric buses and LNG trucks will have a bigger impact on curbing consumption of transportation fuels than the electrification of passenger vehicles.
In the U.S., IEA believes that fuel-economy standards for passenger cars will restrain gasoline demand, with oil demand growth coming from the petrochemical sector, which is thriving thanks to low-cost ethane. New global petrochemicals capacity will account for 25% of oil demand growth by 2023. Meanwhile, a new marine fuel rule with lower sulfur content, which will come into force in 2020, is creating uncertainty in the market.
Five-year output outlook. Global oil production capacity is forecast by IEA to grow 6.4 MMbpd, to reach 107 MMbpd by 2023. Thanks to its prolific shale plays, the U.S. leads the growth, with total liquids production reaching nearly 17 MMbpd in 2023, up from 13.2 MMbpd in 2017. Growth is led by the Permian, where IEA expects output to double by 2023.
The agency sees clear sailing for getting those additional barrels to world markets. IEA says, that as a result of new investments in pipelines and other infrastructure that will ease current bottlenecks, U.S. crude export capacity will reach nearly 5 MMbpd by 2020.
Almost all OPEC output growth is expected to come from the Middle East. In Venezuela, oil production has fallen by more than half in the past 20 years, and IEA predicts that declines are set to accelerate. Sharply falling production in Venezuela would offset gains in Iraq, resulting in OPEC crude oil capacity growth of just 750,000 bpd by 2023. Finally, the agency says that unless there is a change to the fundamentals, the effective global spare capacity cushion will fall to only 2.2% of demand by 2023, the lowest number since 2007. We have five years to see if IEA is right.
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