Oil Market Outlooks Need A Deeper Geopolitical Understanding #Energy
International Energy Agency released its Oil 2018 report on 5 March 2018.
The report is the IEA’s annual five-year forecast of global oil demand, supply refining, and trade covering the period between 2018 and 2023.
According to IEA’s report, “Global oil demand growth remains healthy driven by developing countries in Asia, even as oil consumption growth slows down in China thanks to new environmental policies designed to curb air pollution. Strong growth in petrochemicals demand globally is another key area of growth.”
Based on an optimistic yearly economic growth rate of 3.9% in the early part of IEA’s forecast period, the report states that “Strong economies will, in turn, use more oil” and they expect oil demand to grow at an average annual rate of 1.2 mb/d. According to the study, by 2023, oil demand will reach 104.7 mb/d, up 6.9 mb/d from 2017.
Another significant outcome of the report is on the driving sector of such demand rise to be the petrochemical sector. “The fastest-growing source of global oil demand growth are petrochemicals, particularly in the United States and China.” says the IEA.
The so-called shale revolution led by the US continues to feed and support the petrochemicals sector as a cheap feedstock. More people in developing countries are expected to increase the demand for consumer goods and services most of which would be using this cheaper feedstock for those products like “personal care items, food preservatives, fertilisers, furnishings, paints and lubricants for automotive and industrial purposes.”
On the supply side however, the downward trend in investments has not yet been recovered. In 2015 and 2016, the upstream investments showed a 25% decline compared to previous years while 2017 showed no signs of recovery and 2018 showed only a very modest rise. In addition, the upstream (exploration and development) investments seem to be concentrated on the light tight oil (LTO) investments in the US meaning that the average and overall costs would be rising. Those declines resulted with an historic collapse in oil prices that saw benchmark crude futures fall from more than $100 a barrel in 2014 to below $30 in 2016. However the market (and the oil price) recovered since the 14-member OPEC cartel partnered with Russia and other producer nations decided to cut output last year.
The recent developments and trends taken all together indicate a possible stagnant supply side compared to a flourishing demand side in the coming 5 years period.
OPEC’s World Oil Outlook 2040, published in 2017 also credited the US tight oil production to be dominating the global oil supply in the short term. The same study foresses that “Total non-OPEC liquids supply is forecast to grow from 57 mb/d in 2016 to 62 mb/d in 2022, with the US alone making up 75% of that increase. Besides the US; Brazil and Canada are the most important contributors to non-OPEC supply growth in the medium-term. China and Mexico see the most pronounced decline.”
According to OPEC, “Canadian oil sands, Brazilian pre-salt barrels and Kazakhstan’s giant oil fields are noteworthy sources of supply growth beyond 2020, but these are insufficient to offset declines elsewhere. Demand for OPEC crude is projected to remain just over 33 mb/d until US tight oil peaks in the mid-2020s, after which demand for OPEC crude rises steadily to reach 41.4 mb/d by 2040.”
The IEA report further notes that, “the oil production in China, Mexico and Venezuela fell by a combined 1.7 mb/d as a consequence of lower investment.” While some recovery in China and Mexico could be expected, the OPEC supply side is also not promising. Venezuela is in a political crisis which is adversely effecting the oil supply side.
The ban on exporting crude oil was lifted in 2015 and the US oil exports have already reached to 2 mb/d. However, we also have to underline that, while the US became a net gas exporter, it is still a net oil importer. Energy Information Administration (US Department of Energy) data indicates that the US imported 9.9 million barrels of crude oil and products a day in December 2017 while it exported 7.3 million barrels of crude oil and products a day the same month. While the country is still an oil importer, the PIRA Energy Group estimates that “American crude exports will grow to 2.25 million barrels a day by 2020, a four-fold increase from 2016. The boom would put the U.S. in roughly the same league as major oil exporters including the United Arab Emirates and Kuwait.”
Overall, the oil market is likely to tighten by 2023 with increased risk of price volatility according to the IEA Oil 2018 report.
These reports are strongly based on market demand and supply analyses while slightly mentioning or focusing on the geopolitical dynamics.
Given the chaotic and unstable Middle East and Africa geography which together hold the 55,2 % of the World proven oil reserves as well as 50,1 % of the World proven gas reserves, we may face a tighter supply market which means a higher oil price margin than expected. The EIA estimates a 82.95 dollars a barrel price for crude oil in 2023 as shown in the above given diagram. The ongoing proxy war in Syria and Iraq, the crisis in Venezuela, the ongoing unstability in producers like Nigeria and Libya… All have a significant potential to increase the already volatile oil markets.
We all benefit a lot from the IEA, EIA, OPEC and similar analyses however there is a growing need for a much more detailed Outlook focusing much deeper on the geopolitical dimension of the energy markets.