IEA: Oil Price Spike Coming In 2020

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

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.

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.”

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.

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.

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canadian shenanigans's picture

Only two words Rock the Casbah...

 

Fuck Yeah The Clash!!

Now the king told the boogie men You have to let that raga drop The oil down the desert way Has been shakin' to the top

https://youtu.be/bJ9r8LMU9bQ

ShorTed's picture

This is some desperate shit!  No really, we can predict oil supply/demand 2+ years into the future.  More electric vehicles coming online every day, fuel efficiency increasing each year and people with less free cash to spend all call bullshit!

canadian shenanigans's picture
Electric Cars Are Not Necessarily Clean

 

ShorTed's picture

I agree 100%, but that's not what the post is about...it's about The Clash!

Occident Mortal's picture

EV's are actually fuelled by gas power stations.

Why do you think Syria was burnt to the ground?

EV's do nothing but empower the gas giants, Russia, Iran , Qatar.

fx's picture

more electric cars every day? Like, one out of thousand? LOL

Yeah, they will make a difference. Someday. After 2030

fx's picture

After 2020, we will see shale supply collapse due to the inevitable rapid decline rates of shale wells . 2bn barrels /day of spare capacity won't compensate for even half of that

Stroke's picture

I'll beleive it when I see it

 

Again with the peak oil bullshit

canadian shenanigans's picture
il y a 1 an

 

Today in things that will never happen: An arab gets into a car with a jew... and this is not kosher?!
Wrenching Away's picture

That article never mentioned peak oil, they said peak demand. Two different things.

Lanka's picture

Solar power for transportation?

BritBob's picture

Falklands Oil

By a ruling of the UN, Argentina will extend its maritime platform (Politica Argentina) ; New map of the maritime platform reaffirms the sovereignty of Malvinas with UN endorsement (ElCronista); Argentina enlarges its territory 35%, with a UN endorsement ...(La Capital).To add to this euphoric atmosphere the Argentine Foreign Minister stated, ''This is a historic opportunity for Argentina. We have taken a great step in the demarcation of the outer limit of our continental shelf; the most extensive boundary of Argentina and our border with humanity,'' Foreign Minister Susana Malcorra told La Nacion, which tomorrow will publicly announce the details of this resolution. (Susana Malcorra, quoted by Dinatale M, La Nacion, Argentina, 27 March 2016).

 

But what is the truth...

Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-

https://www.academia.edu/33898951/Argentinas_Continental_Shelf_Claims_-The_UN_CLCS_Commission

 

NoDebt's picture

You're annoying enough in the morning.  I don't want to hear from you in the afternoon.

 

arby63's picture

Pathetic headline and article.

NoDebt's picture

Replace 'IEA' with 'IKEA' and it's more entertaining.

 

Ben A Drill's picture

Mini ice age in 2020 will kill crops so starvation will do us in, not oil prices. Wood stoves anyone?

ReturnOfDaMac's picture

When it comes to energy, oil ain't the only game in town ya know.  Sure it's high energy density but only a good deal at the right price!

Apply Force's picture

Oli is the backbone of the global economy - no oil, no food.

 

And how exactly do prices rise in a global commodity when the global economy can't afford higher prices?   Pretty sure that's why we have low prices now - higher priced oil (and knock on effects) creates stagnation. 

NoWayJose's picture

Plausible - if Bernie wins.... uh, never mind...

shankster's picture

Florida Power and Light dropped the ball big time after Hurricane Irma. If a truly massive Cat 5 hit Florida it would be knocked back to the stone age and it would take FPL 5 years to get the lights back on.

Apply Force's picture

Some lights would never come back on

adr's picture

What a surprise, Nick Cunningham wants $200 a barrel oil. 

Miles driven are going to fall off a cliff in America, China wants electric only cars by 2030, UK wants electric only in cities in five years, India's economy is going back to the 1600s, and China's population is going to nose dive. 

I fail to see the rosy IEA demand forecast. Is this the same IEA that overshot oil demand by a few billion barrels over the last decade? 

shortonoil's picture

 

Raw material cost are already breaking the back of US refineries. It is refineries who determine the price of crude because they are the only ones who buy it. If crude price escalate much a lot of refiners are just going to shut their doors. The retail market can not tolerate a price hike at this point.

The economy is too weak.

 

http://www.thehillsgroup.org

sinbad2's picture

Refiners are the same people who drill the oil, they just profit shift.

The real threat to the oil majors are Chinese refiners who don't control the complete supply chain, and are undercutting the  oil cartels.

sheketebaka's picture

If that's what the electorate wants, and possibly the state of diplomatic relations with Russia.

The popluation would probably lose patience eventually spending 25% of their income on gasoline when they know it costs $10 to produce a barrel of oil. Less during wartime.

The wind turbines are really pretty in Oklahoma. Unfortunately the wind ceases to function once you cross the border of Texas. Some strange anomaly.

sinbad2's picture

The average price of oil between the end of WWII and the US default of 1971 is about 12 barrels of oil per ounce of gold.

Manipulations of both commodities since 1971 makes it difficult to get a true price for either, but at the current gold price, oil should be about US $110 a barrel. Or at the current oil price, gold should be worth about 600 bucks an oz.

But there has been so much price manipulation since 71, we might have to wait until after the dollar to know the true value of either.

Dammit Walter's picture

Oil companies are desperately trying to reduce costs on production, upstream, midstream, and downstream to maintain profits in the low price regime.  Even expensive oil equipment/services, although dead in the short term, is attempting to retool for 50% cost cuts on equipment and services asap.  Big R&D money is being spent.  These productivity gains are going to come partly from new technology with standardizing and modularizing equipment, and mass producing, and the other gains are going to come from automation.  

If demand increases, there should be plenty of production coming online (maybe not fast enough to stave off a price shock) and prices probably wont go too high long term.

If demand stays flat or decreases, oil price is probably going to even lower in the longer term.

Also, if the dollar gains strength... oil will likely go lower as well.