Source: Platts Barrel Blog | Robert Perkins, Senior writer/editor | May 22, 2017
That the global oil market is set to tighten over the coming years is not in doubt, but whether it’s time to hit the panic button over a future supply crunch is another issue.
Industry warnings over the risk of an oil supply “crunch” and a potential return to high-cost oil in the coming decade due to the massive cuts in upstream spending since 2014 have been circulating for some time.
The consensus is that rebounding US shale supplies will keep a lid on oil prices at least in the short term, but there is much less unanimity on whether the oil market will enjoy a soft or painful landing some five years from now.
The International Energy Agency in October said sliding levels of investment in conventional oil fields was putting future flows from the sector on a knife’s edge, threatening to create a supply gap of some 16 million b/d by 2025.
OPEC and a number of leading oil market watchers have also sounded caution over an impending return to an oil price bull cycle unless new oil projects are sanctioned quickly and the investment dollars begin to flow.
The underlying logic, they believe, is straightforward. After peaking at almost $700 billion in 2014, global upstream spending collapsed to $433 billion in 2016 following two back-to-back declines of about 25% a year, according to the IEA. As a result, more than 6 million b/d of projects have been postponed or canceled across non-OPEC and OPEC countries.
At the same time, oil demand growth is set to climb by at least 1 million b/d each year while field decline rates are accelerating, raising the requirement to fill an ever bigger hole in future flows from existing fields.
Global dependence on US shale output will grow but, the reasoning goes, even under the most optimistic scenarios, shale will simply be unable to plug
the impending supply shortage and OPEC’s own spare capacity will wear ominously thin.
By the IEA’s reckoning, demand for OPEC crude is expected to jump to 35.8 million b/d by in 2022, up from 32.2 million b/d last year.
The sharp increase means OPEC spare capacity will contract to less than 2% of global demand in 2022, a 14-year low and almost half the levels in 2008
when oil prices hit record highs.
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