Oil market rebalancing and price recovery will be limited: IEA

LONDON (ICIS)–The International Energy Agency (IEA) on Tuesday said efforts to rebalance oil market supply will be limited and will trigger only a restrained recovery in prices, and put its “price assumption” for crude oil prices at an average of $55/bbl for 2015.

“Prices [will be] stabilising at levels higher than recent lows but substantially below the highs of the last three years,” the IEA said.

In the medium-term, average crude prices are seen rising to just over $60/bbl in 2016 and $73/bbl in 2020. The “price assumptions” are based on the crude oil futures curve as of January 2015 and are not price forecasts, the agency cautioned in its 2015 Medium-Term Oil Market Report.

“While participants expect the market to rebalance in response to low-price signals, reduced long-run price expectations reflect the perception that the oil market has undergone a long-term structural shift marked by deep-seated changes in supply and demand dynamics,” the agency said.

“The usual market logic dictates that the deeper and faster a price decline, the stronger the recovery; conversely, the faster a rally, the more severe the inevitable correction,” the IEA added.

However, the rebalancing would be different this time because the increased price elasticity and responsiveness of non-OPEC producers would lead to a swift recovery, but it would be limited in scope because of the decreasing price elasticity of demand which remains dull.

“This unusual response to lower prices is just one more example of how shale oil has changed the market,” said IEA Executive Director Maria van der Hoeven, who launched the report at the International Petroleum Week conference in London.

Non-OPEC supply rebalancing is expected to be comparatively swift especially after OPEC surprised the market by maintaining its supply quota in November 2014.

“OPEC’s move to let the market rebalance itself is a reflection of that fact,”van der Hoeven said, but added that “It may have effectively turned LTO [light, tight oil] into the new swing producer, but it will not drive it out of the market. LTO might in fact come out stronger.”

Non-OPEC supply is estimated to hit 60m bbl/day by 2020, with growth slowing to an average of 570,000 bbl/day per annum compared with record gains of 1.9m bbl/day in 2014, and an average 1m bbl/day in 2008-2013.

Nonetheless, any non-OPEC supply cuts would be limited in scope, barring any major supply disruption or energy-related policy changes, the agency said.

Global production capacity is still expected to increase to 103.2m bbl/day over the next six years which amounts to a 5.2m bbl/day increase. Two thirds of this growth will be from non-OPEC producers.

North American production will “pause” in response to crude price erosion but by the beginning of the next decade, the region’s non-conventional supply will account for an even large share of the crude oil supply mix than earlier forecast.

“While estimates of its production have been adjusted downwards, the region nevertheless still leads global supply growth by a wide margin by 2020, with forecast gains of 3.0 mb/d,” the IEA said.

US LTO growth will initially slow down but will then rapidly gain momentum later on, bringing production to an estimated 5.2m bbl/day by 2020.

“Although questions remain about the availability of capital to LTO producers on the rebound, on balance LTO investment cutbacks are not expected to have as long-lasting an impact as other spending cuts,” the agency said.

Other sources of non-OPEC supply will not be able to face the price reset with as much resilience.

Russian supply growth is now projected to shift to contraction of more than 500,000 bbl/day by 2020, down from an earlier projection of small growth and “will likely emerge as the industry’s top loser.”

Meanwhile, despite OPEC’s stated objective of defending its market share, its crude capacity is projected to gain only 1.2m bbl/day in the years to 2020, an average of 200,000 bbl/day per annum.

“Iraq alone accounts for almost all of the increment, as other [OPEC] producers curtail spending or struggle with low prices and security issues,” IEA said.

Iraq has already defied expectations and managed to increase its oil production by a monthly average of 3.7m bbl/day, which is a 35-year high, despite the twin challenges of the oil price erosion and threat from Islamic State insurgents, the agency said.

Meanwhile, the IEA has revised down its estimates of world oil demand growth in line with IMF forecasts of underlying economic growth: “Demand growth is
expected to slow markedly, to 1.1m bbl/day per annum over the next six years, from the “normal” pace of expansion exhibited prior to the financial crisis of 2008-2009.”

“This time around it is not business as usual. The global economy has become less oil intensive,” van der Hoeven said at the International Petroleum Week conference.