IEA sounds alarm over medium term supply: Update
Adds comments from Fatih Birol on spare capacity, US and China at CeraWeek event.
London, 6 March (Argus) — Crude supply growth "all but stalls" after 2020, leaving spare capacity of just 2mn b/d, the IEA said today, calling on the industry to investment more to increase oil production capacity and avoid the risk of a sharp increase in oil prices.
The projected spare capacity would amount to less than 2pc of global demand in 2022, IEA executive director Fatih Birol said. By comparison, "you all remember that in 2008, when we had high prices, the share of spare capacity to demand was 4pc," Birol said at the IHS CeraWeek conference today in Houston. "It is an important reason for us at IEA to be worried."
In its latest five-year outlook, the OECD energy watchdog said "the oil market today seems remarkably sanguine about this issue, but this feeling might not persist for too long before the realisation dawns that unwelcome price pressures might lie ahead." Investment in new projects fell back with the oil price fall that began in 2014 and development work would have to be sanctioned "without delay" to compensate.
The forecast squeeze on capacity is disguised by a rapid near term ramp up of US tight oil output. The Oil Market Report 2017 (OMR 2017) said 2017 US tight oil production will be 500,000 b/d up from 2016, using a Brent price of about $60/bl as a base case assumption. US tight oil output is expected to be 1.4mn b/d higher by 2022 under the base case, the report said. At $80/bl, the increase could be 3mn b/d.
"We are witnessing the start of a second wave of US shale growth and its size will depend on where prices will go" as US shale supply has proven to be price elastic, Birol said. The US, Brazil and Canada are leading the projected non-Opec production growth, although the forecast for Canada depends on construction of infrastructure designed to take crude to markets in the US and elsewhere.
Ample supply even amid the cuts has left the futures curve flat up to five years out, the IEA said.
By 2022, total crude supply is expected to be 5.6mn b/d higher than in 2016. Overall non-Opec production is forecast at 60.9mn b/d, which is 3.3mn b/d up on 2016 as the US, Brazil, Canada and Kazakhstan boost output, and Russia maintains production around 11.3mn b/d.
But the rate of growth slows dramatically from 1.3mn b/d in 2018 to just 200,000 b/d in 2022. With demand seen rising by an average of 1.2mn b/d each year over the five-year horizon, that leaves the call on Opec crude rising to 35.8mn b/d in 2022 from 32.2mn b/d last year. That 3.6mn b/d increase exceeds a forecast rise in Opec production capacity of 1.95mn b/d, leaving spare capacity of under 2mn b/d.
Iraq is the powerhouse behind Opec production growth in the period, the OMR 2017 said. Its output is expected to reach 5.4mn b/d by 2022 with growth concentrated in the south of the country and exported through Basra. The government target of 6mn b/d by 2020 looks unattainable, the report said.
Iran is forecast to achieve a sustainable crude capacity of 4.15mn b/d by 2022. That would represent "solid growth" from 3.75mn b/d in 2016 but would not allow it to regain its pre-sanctions position as second largest Opec producer after Saudi Arabia.
And Saudi Arabia is expected to maintain capacity of around 12.4mn b/d from 2019 to 2022, leaving it in its customary position as the only country in the world with substantial spare capacity, assuming production remains around 10.4mn b/d.
The IEA's forecast for annual global oil demand growth in 2016-2022 is little changed from a year ago. The 1.2mn b/d or 1.2pc amounts to 7.3mn b/d in the period, some 0.3 percentage points lower than for 2010-2016. Petrochemical demand will amount to around one third of the growth and transportation just under one half. Non-OECD countries will see demand rise by 8.5mn b/d while OECD demand drops by 1.2mn b/d, so non-OECD demand is 56pc of the total by 2022.
Indian demand growth is expected to continue rising strongly while China's slows. But China's domestic output also is projected to decline, which means the country's oil imports will continue to increase through 2022.
Asia's crude import requirement is projected to rise to 25mn b/d in 2022, from 21mn b/d in 2016, a rate of increase that cannot be met by traditional Middle East suppliers.
Electric cars are not expected to have a significant impact on demand in the period. And tighter vehicle regulation is only seen slowing global demand growth for transport fuels, not reversing it.
Among the major uncertainties that OMR 2017 identifies are: whether the US introduces a Border Adjustment Tax; whether further sanctions are imposed on Iran by the US; how long the production cut agreements of Opec and some non-Opec countries continue; and the production profiles of Libya, Nigeria and Venezuela.
The IEA's five-year outlook was previously known as the Medium Term Oil Market Outlook.