The Next Ten Years In Oil Markets

Authored by Tsvetana Paraskova via OilPrice.com,

An eventful 2019 wraps up a decade of turmoil in oil markets, in which Brent Crude prices fluctuated from as high as US$125 a barrel in 2012 to as low as US$30 per barrel in January 2016.  

Geopolitical turmoil, economic growth, soaring U.S. shale production, and OPEC’s various policies to try to set the trends in oil prices marked the decade which is drawing to a close.

For the decade beginning in 2020, the key factors determining the price of oil are likely to be similar to those we have seen over the past decade, Andy Critchlow, Head of News, EMEA at S&P Global Platts, writes.

The state of the global economy, U.S. oil production and exports growth, and the OPEC+ alliance between the cartel and a dozen non-OPEC producers led by Russia will continue to influence the price of oil through 2030.

Geopolitical flare-ups and U.S. sanctions policies toward major oil producers, including Iran and Venezuela, will also shape the supply side of the market over the next few years.

On the demand side, the growing share of renewables in the energy mix and the increased use of electric vehicles (EVs) will begin to displace meaningful volumes of fossil fuel demand in power generation and oil demand in transportation over the next decade, many analysts say. Growing climate concerns may also start impacting investment decisions in new fossil fuel production, including oil.

The fundamental supply and demand picture will likely be ‘more of the same’, but the push and policies toward greener economies could be the new factor shaping oil markets and influencing oil prices over the next decade.

According to S&P Global Platts Analytics, alternative energy—including renewables, higher EV penetration, and hydrogen use—“will limit the overall call on fossil fuels.

“As we enter a new decade, the energy complex feels like it is all cascading towards a race to the bottom,” S&P Global Platts Analytics said in a research note.

Many forecasts predict oil demand peaking at around 2030 or in the 2030s. Global oil demand will reach its peak in the mid-2020s and flatten out in the 2030s, the International Energy Agency (IEA) said in its latest annual World Energy Outlook.

“Oil demand for long-distance freight, shipping and aviation, and petrochemicals continues to grow. But its use in passenger cars peaks in the late 2020s due to fuel efficiency improvements and fuel switching, mainly to electricity. Lower battery costs are an important part of the story: electric cars in some major markets soon become cost-competitive, on a total-cost-of-ownership basis, with conventional cars,” the IEA said in its outlook to 2040.

Unsurprisingly, OPEC continues to see oil as the fuel with the highest share in the global energy mix through 2040. The Organization of the Petroleum Exporting Countries expects EVs to hold a share of just 13 percent of the global car fleet in 2040 and sees the majority of the growth still coming for conventional internal combustion-engine vehicles.

OPEC has also been warning since the oil price crash in 2015-2016 that reduced investments in conventional oil after the price plunge will start to impact global oil supply in the 2020s. Through 2040, the world will need US$10.6 trillion in total investments in oil, OPEC said in its World Oil Outlook 2019 in November.

In the new decade, OPEC and its allies in the current OPEC+ pact will have to reckon with U.S. shale production, where growth is slowing these days as prices remain bound in a narrow range. But U.S. production will still grow in 2020, by more than 1 million bpd, according to nearly all major forecasts. U.S. shale production is expected to start declining in the middle or late 2020s, according to OPEC’s estimates.

The OPEC+ alliance will be tested as early as this coming March, when the partners are meeting to discuss how to proceed with their production cuts.

The coming decade will also test how (ir)relevant OPEC is on the global oil market, considering the supply growth from countries outside the production pact, the rising share of renewables and EVs amid falling technology costs, and growing concerns about climate change.

Global economic growth and recessions will undoubtedly also impact oil demand and oil prices over the next decade. So will the ever-restive Middle East with the Saudi-Iran antagonism and global powers vying for influence in a region home to one fifth of the world’s daily oil supply.