Global oil supply may lag behind demand after 2020 on low capex – IEA

LONDON (ICIS)–The global supply of crude oil may struggle to keep up with demand after 2020 due to the lack of capital expenditure (capex) in new projects since 2015, the International Energy Agency (IEA) said on Monday.

The Paris-based body added that prices could rise sharply if supply struggles to keep pace with demand.

“The global picture appears comfortable for the next three years but supply growth slows considerably after that. The demand and supply trends point to a tight global oil market, with spare production capacity in 2022 falling to a 14-year low,” said the IEA in its Oil 2017 report.

Three countries in the Americas, the US, Canada and Brazil, will account for most of the new oil supply in the next few years, said the IEA.

However, that growth could stall by 2020 if companies do not reverse the lower capex policies implemented since 2015 following the collapse in the crude oil price which saw many producers struggling to break even.

“While investments in the US shale play are picking up strongly, early indications of global spending for 2017 are not encouraging,” said the IEA.

“Oil demand will rise in the next five years, passing the symbolic 100m bbl/day threshold in 2019 and reaching about 104m bbl/day by 2022.”

Most of the growth in demand for crude oil will come from developing countries, with Asian countries dominant.

In fact, the IEA said India’s demand for crude oil in 2022 will outpace that of China, which is currently the major consumer.

On the supply side, the largest contribution will come from the US, where production of light tight oil (LTO) will growth to 1.4m bbl/day by 2022 “if prices remain around $60/bbl,” said the IEA.

“Expectations for US LTO are higher than last year’s forecast thanks to impressive productivity gains,” it added.

“The US responds more rapidly to price signals than other producers. If prices climb to $80/bbl, US LTO production could grow by 3m bbl/day in five years. Alternatively, if prices are at $50/bbl, it could decline from the early 2020s.”

Within the OPEC production cartel, the supply growth will come from low-cost producer countries in the Middle East, namely Iraq, Iran, and the UAE, while other countries like Nigeria, Algeria and Venezuela will decline.

Russia’s crude oil production is expected to remain flat over the next five years.

Regarding the transportation sector, a major consumer of crude oil derivatives, the IEA said that electrification of vehicles will still be minor by 2022 and that they will “displace only limited” amounts of transportation fuel by 2022.

“We are witnessing the start of a second wave of US supply growth, and its size will depend on where prices go. But this is no time for complacency. We don’t see a peak in oil demand any time soon,” said the IEA’s executive director, Fatih Birol.

“And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”