The global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated, according to the International Energy Agency.
While US shale oil production will retreat this year and next as the price slump hits drilling, its subsequent recovery will ensure America remains the biggest source of new supply to 2021. The Organization of Petroleum Exporting Countries will expand its market share slightly this decade, with Iran, newly released from international sanctions, displacing Iraq as the organisation’s biggest contributor to supply growth.
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices,” the Paris-based adviser to 29 countries said in its medium-term report yesterday. “It is hard to see oil prices recovering significantly in the short term from the low levels prevailing.”
The IEA’s new outlook is the latest sign that oil forecasters are bracing for a “lower-for-longer” price environment. The agency acknowledged that the industry’s expectations - and its own predictions - that oil markets would recover in 2015 proved “very wide of the mark.” The report also signals that while Opec will succeed in its policy of defending market share, the group will have to endure an extended period of reduced revenues.
Oil futures have sunk by 42% in the past year as the global surplus was prolonged by resilient US crude production, increased supply from key Opec members and slowing economic growth in China.
After declining this year, supply from outside Opec will remain stable in 2017 and recover in 2018, growing by 2mn barrels in the six years to 2021 to reach 59.7mn bpd. Prices won’t need to rebound to $100 a barrel to finance that new output, the agency said.
While US production of shale oil, also known as light-tight oil (LTO), is projected to retreat by 600,000 bpd this year and a further 200,000 a day in 2017, it will still expand during the period as a whole as growth resumes. Total US liquids output will increase by 1.3mn bpd by from 2015 to 2021 as drillers lower costs and improve efficiency.
“Anybody who believes that we have seen the last of rising LTO production in the US should think again,” the IEA said.
The agency increased estimates for global oil demand each year to 2020, mostly as a result of revisions to historical or “baseline” data. The estimate for annual growth in world fuel consumption remains at a “very solid” average of 1.2% through to 2021, when it will reach 101.6mn barrels a day.
As a result of the increase in demand and weaker growth in supply, Opec’s share of the total market for crude will reach 33.8% in 2020, up from last year’s projection of 32.4%. The amount of crude required from exporters’ group will expand to 34.8mn bpd by 2021, compared with production of 32.1mn last year, the IEA said.
Much of the boost in Opec supply will come from existing facilities, with the organization set to add only 800,000 bpd of new capacity in the period to 2021 as members outside the low-cost Middle East struggle to grow. Capacity will stagnate or shrink slightly in Algeria, Angola, Ecuador, Indonesia, Nigeria, Qatar and Venezuela.
Over the longer term, sharp cutbacks in investment leave global supplies exposed to “unpleasant oil-security surprises in the not-too-distance future,” according to the IEA.
Spending on new output will fall by 17% in 2016 after a 24% collapse last year, mostly in the US As a result of the cuts, the agency lowered its estimates for non-Opec supply for each year except 2016, with Russian supply set to suffer the steepest decline in the period.
“It is very tempting, but also very dangerous, to declare that we are in a new era of lower oil prices,” the agency said. “The risk of a sharp oil price rise towards the later part of our forecast arising from insufficient investment is as potentially destabilising as the sharp oil price fall has proved to be.”