Supply growth, Russian production continue to top analysts’ lists of concerns

March 7, 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.

Offshore staff

HOUSTON – 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 organization says that the global picture appears comfortable for the next three years but supply growth slows considerably after that, according to its market analysis and forecast report Oil 2017 (formerly the Medium-Term Oil Market 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.

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 slump of 2015 and 2016 is not reversed. While investments in the US shale play are picking up strongly, early indications of global spending for 2017 are not encouraging.

Oil demand will rise in the next five years, passing the symbolic 100 MMb/d threshold in 2019 and reaching about 104 MMb/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 China by then, the IEA says. While electric vehicles are an important factor for oil demand, the IEA estimates they will displace only limited amounts of transportation fuel by 2022.

“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.”

Recently, theUS Energy Information Administration reported in its monthly Drilling Productivity Report that output from seven major shale plays in the US would rise 80,000 b/d from February to March. Production from the Permian alone was said to increase by 70,000 b/d over the period.

A Reuters article discussing these rates against theOPEC cuts said that the rise in US production is undermining and offsetting the cartel’s efforts.

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

The US responds more rapidly to price signals than other producers. If prices climb to $80/bbl, US LTO production could grow by 3 MMb/d in five years. Alternatively, if prices are at $50/bbl, it could decline from the early 2020s.

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. For its part, production fromRussia is forecast to remain stable over the next five years, IEA added.

In a recent note from Evercore ISI on Russian production, the analyst firm’s Oilfield Services, Equipment & Drilling group weighed in, writing that concerns surrounding the rates were “overblown.”

The note pointed out that “Russian oil and gas condensate production remained flat month-over-month at 11.11 MMb/d in February, according to data from the Russian Energy Ministry, down just 100 MMb/d from the October 2016 baseline of 11.2 MMb/d. Russia had agreed to cut production by 300 MMb/d during 1H 2017 with 200 MMb/d of reductions coming in 1Q.

“While a lack of full compliance from the non-OPEC side may spook some investors, we attribute its fluidity to the number of companies operating in the region and the desire to manage production declines; with such a broad production portfolio, efforts to cut will not yield instantaneous results.

“At the end of the day, (President of the Russian Federation Vladimir) Putin gets what he wants, and higher oil prices would certainly be a welcome change for the beleaguered economy. Greater than 100% compliance from the Kingdom of Saudi Arabia will serve to support prices during this OPEC/non-OPEC transition period toward full compliance.”


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