A remarkable consensus has emerged among the world’s oil price crystal ball gazers. Demand continues to grow. Global spending cutbacks are setting up a supply shortage. It’s just a matter of time.
Despite the relentless hype about oil demand destruction caused by electric vehicles, renewables and petroleum-driven climate change, there is no end in sight for oil being the world’s number one transportation fuel. Prices are going to rise.
And the tall foreheads who study these things have calculated the price spike will take place in exactly three years. Call it 20/20 foresight. This level of forecasting precision has always been wrong in the past. Here’s the information. You decide.
Demand continues to grow. The International Energy Agency (IEA) reports consumption increased in the second quarter at an annualized rate of 1.5 million bbls/d while the U.S. Energy Information Administration (EIA) predicted global demand will reach 100 million bbls/d next year. According to the 2017 BP Statistical Review of World Energy, this is nearly 14 million bbls/d higher than 2008 meaning average growth is 1.4 million bbls/d per year.
Meanwhile, capital investment in new supplies has plummeted sharply since the price collapse. The IEA reported in its July 2017 annual global investment review from 2014 to 2016 reserve replacement CAPEX fell 44 per cent. This has recovered in 2017 but is not consistent.
While U.S. spending is up 53 per cent from last year the global average is only three per cent. As recently as March, the IEA warned that “global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices unless new projects are approved soon.” The IEA sees demand at 104 million bbls/d by 2022, 7.5 million bbls/d higher than the first quarter of 2017.
Continued demand growth combined with lower investment—plus ongoing continued decline rates from existing reservoirs—ensure the supply demand curves will cross and oil prices will rise. What we see today is not what we’re going to get in the future.
So why 2020?
One factor is inventories. An article on oilprice.com on July 19 noted that while Saudi Arabia did indeed join the rest of OPEC in cutting back production on January 1, that didn’t mean it couldn’t sell oil out of inventory. According to a Reuters news report, Saudi inventories were down 71 million barrels since a peak in October of 2015 to the lowest level since 2012. The Saudis are actually selling more oil than they are producing, which doesn’t help.
A CIBC Investment Research note on July 19 reported as of mid-July U.S. inventories were coming down but only recently returned to 2016 levels and remain on the high end of the five-year average. The Organization for Economic Cooperation and Development (OECD) inventories for the same period are finally within five-year averages and below 2016 levels.
Inventories matter to commodity traders because this data from U.S. and western OECD numbers is the only information they can trust to determine if there is actually less oil around thanks to OPEC supply cutbacks. Because even when OPEC reports total output it uses some western data because accurate figures from its members are either unreliable or non-existent.
The other factor is increased production from long-term projects like deepwater offshore and oilsands coming on stream for the first time in 2017 and 2018. According to CIBC, new production from Brazil, Canada, the U.S., Russia and other countries will contribute two million incremental bbls/d this year and another 1.3 million next year. The EIA reports U.S. production growth thanks to the Gulf of Mexico and the Permian Basin continues with output in that country up one million bbls/d on July 17 compared to the recent low in October of 2016.
The good news is there are no meaningful big projects slated for 2019 and beyond. The bad news is this output greatly reduces the impact of the OPEC et al production cuts.
Therefore, based on what everyone knows today, the better days for oil prices are 2019 and beyond which is 2020. At the recent World Petroleum Conference in Istanbul in early July, this view was shared by Total SA, Weatherford International, Baker Hughes and Halliburton.
However, at the same conference Saudi Arabian Oil Company chief executive officer Amin Nasser warned he is increasingly worried about where the oil will come from next decade after US$1 trillion in investments have been postponed since the price collapse.
Historically, most oil price forecasts have been wrong. Supply will decline because of spending cuts as demand continues to grow. Prices will rise, and sooner than everyone thinks.