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IEA: Oil prices could skyrocket by 2020

Oil worker
Iraqi workers stand near a pipeline as it ejects oil at Al Tuba oil field in Basra, southeast of Baghdad REUTERS/Essam Al-Sudani

The oil market has been awash in crude for more than three years, and OPEC has struggled to accelerate the rebalancing effort, but the world could be heading for a supply crunch in a few years due to the sharp fall in industry spending.

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The halving of oil prices from $100 per barrel before 2014 down to just $50 today has led to a corresponding plunge in upstream investment. But even as benchmark prices seem to have stabilized over the past year, with most analysts predicting gradual and modest gains in the year ahead (depending on OPEC’s actions), there’s still no sign of a serious rebound in spending levels.

The problem of a shortage of supply seems very far off today, given the swift turnaround in U.S. shale and persistently high levels of crude storage.

But demand continues to rise—the IEA just upgraded its demand growth estimate for 2017 to 1.6 million barrels per day (mb/d). If that level of demand growth continues for a few years, it will more than devour the excess supply on the market. Even a more tempered growth rate would strain supplies toward the end of the decade, absent a corresponding uptick in production.

“There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices,” Neil Atkinson, head of the IEA’s oil markets and industry division, said at a conference in Bahrain. “There is at least a possibility of going back to the situation we had 10 years ago where oil prices were very, very high at a time when demand was growing.”

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Atkinson warned that the market’s spare capacity—largely concentrated in Saudi Arabia—will dwindle as demand keeps rising at a time when supply remains stagnant. The market will tighten and OPEC will have to abandon its production limits in order to satisfy demand. After that, rising consumption could whittle away at the latent surplus capacity. At that point, the market will hit a supply crunch, which would likely result in higher volatility and higher prices.

Just like 10 years ago, spare capacity currently stands at about 2 mb/d. That certainly isn’t the lowest it has ever been, but it’s a relatively small cushion to fall back on in the event of a surprise outage, for example. That volume of spare capacity narrowed in the mid-2000s as the rise of China meant explosive levels of demand growth. When spare capacity fell to about 1 mb/d in 2008, the world saw a historic run up in prices.

The one difference between the mid-2000s and today, however, is that the market is sitting on near record levels of oil in storage, which will act as a sort of second form of spare capacity. It could take a few years to draw down those stockpiles.

On the other hand, unlike 10 years ago, the industry today isn’t spending huge sums to develop new sources of supply. In a 2016 report, the IEA estimated that the industry would need to bring online an additional 21 mb/d of new supply by 2025 just to keep current production flat, after factoring in depletion rates from existing projects plus higher demand levels. At the time of that writing, however, the industry only had about 5 mb/d of new supply in the pipeline, implying a gap of about 16 mb/d, a gap that showed little sign of being bridged.

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Spending has increased a bit this year, but the IEA still warns that it is insufficient to meet future demand.

One big uncertainty that could ease concerns about a future supply crunch is the prospect of peak—or at least dramatically slower—demand, a notion that has recently gained currency. The projections regarding demand really run the gamut. The IEA tends to skew toward more business-as-usual assumptions, downplaying the effect of EVs on demand growth, resulting in forecasts that show relatively strong demand for years to come. Others, including Bloomberg New Energy Finance (which is bullish on clean energy) warn of a drop in oil demand as new technologies take over.

If you’re in the latter camp, then you aren’t worried about an oil supply crunch and a price spike over the next five years or so. Peak demand will mean permanently lower oil prices. But, if you’re going with the IEA, then the current spending drought on new oil projects could translate into a shortage by the early 2020s. The IEA plans on releasing detailed energy investment figures and forecasts on September 19.

Read the original article on OilPrice.com. Copyright 2017.
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