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IEA sees oil supply growth overtake demand: Update

05 Mar 2018 17:51 GMT
IEA sees oil supply growth overtake demand: Update

Updates with Fatih Birol's comments.

Houston, 5 March (Argus) — Global oil supply growth will exceed incremental demand in 2018-20 thanks to increasing output in the US, Brazil, Canada and Norway, according to the IEA.

But additional investment will be needed to deliver supply growth after that, the Paris-based energy watchdog said in its Oil 2018 report — its outlook to 2023.

"Over the next three years, gains from the US alone will cover 80pc of the world's demand growth, with Canada, Brazil and Norway … able to cover the rest," the IEA said. The US alone will account for almost 60pc of global supply growth in 2018-23, the IEA said.

"We are going to see a second wave of US shale production coming strongly," IEA executive director Fatih Birol said today at the CERAWeek conference in Houston. The agency revised its US production growth higher since last year as prices have rebounded — analysis in the current report assumes prices around $60/bl. "If the prices go higher, we must revise our expectations even higher. The US will put its stamp on the global markets in the next five years," Birol said.

But Birol warned that even additional growth in the US and other production would be inadequate for meeting both the projected demand growth and the natural field declines after 2020. The IEA analysis of conventional production suggests a natural decline rate of 3mn b/d, "so the oil industry must replace one North Sea each year in addition to meeting new demand," Birol said.

Upstream investment has stabilized around $400bn/yr in 2016-17 following steep declines earlier, and the IEA sees little-to-no increase in upstream spending outside of the US in 2017 and 2018. Meanwhile, the agency is projecting that oil demand would increase by 6.9mn b/d from 2017 levels, to 104.7mn b/d by 2023, thanks to growing Asia-Pacific economies — mainly China and India — and a resurgent petrochemicals industry.

The petrochemical industry is a blind spot in oil market discussions, where electric vehicles frequently command greater attention, Birol said. "But when we look at the petrochemical industry, we see tremendous growth" both in the US and China, he said.

"China remains the main engine of demand growth, but more stringent policies to curb air pollution will slow growth," the report said. The pace of oil demand growth will pick up slightly in India.

"While there is no peak oil demand in sight, the pace of growth will slow down to 1mn b/d by 2023 after expanding by 1.4mn b/d in 2018," the agency said. "There are signs of substitution of oil by other energy sources in various countries." The IEA expects increasing penetration of electric buses and LNG-fuelled trucks to have a bigger effect than the electrification of passenger vehicles on curbing demand for transport fuels.

New global petrochemicals capacity will account for 25pc of oil-demand growth by 2023, the IEA said. It noted uncertainty around new marine fuels entering the market from 2020.

The agency expects global oil production capacity to rise by 6.4mn b/d to 107mn b/d by 2023.

It sees US total liquids production reaching nearly 17mn b/d in 2023, up from 13.2mn b/d in 2017, with growth led by the Permian Basin where output is expected to double by 2023. The agency said US output could be higher still by 2023 should oil prices surprise on the upside.

Investment in pipelines and other infrastructure will allow US crude export capacity to rise to nearly 5mn b/d by 2020. "Corpus Christi solidifies its position as the primary North American crude outlet," the report said.

The IEA expects a decline in production of conventional crude in non-Opec countries, which excludes US light tight oil, to 2023. It expects almost all of Opec's output increase to come from its Middle East members, with Venezuela's output declines accelerating.

The IEA expects Venezuela's production to plunge by nearly 700,000 b/d by 2023, a major acceleration of the decline projected last year.

"They may be reasons for us to revise down expectations on Venezuela even further," Birol said.

This sharp fall will offset gains in Iraq, resulting in Opec crude capacity growth of just 750,000 b/d by 2023, the IEA said. This figure includes 500,000 b/d of currently-idled production from the Neutral Zone that Kuwait shares with Saudi Arabia.

"Unless there is a change to the fundamentals, the effective global spare-capacity cushion will fall to only 2.2pc of demand by 2023, the lowest number since 2007," the IEA said, which raises the possibility of oil prices becoming more volatile until new supplies come on line.

The agency said while the US shale sector "will continue to adjust to price signals", there will still be "a continued reliance on Opec countries for a major share of global supply" and Saudi Arabia is expected to remain the largest crude exporter in the near future.

The IEA sees China and India replacing the US as the world's largest oil importers. Birol noted that China's imports in the next five year should reach the symbolic 10mn b/d threshold — the record high level of net imports the US reached in mid-2000s, before the rise of shale production.