Opec sees no impending oil supply crunch: WOO

Opec sees limited risk that investment in new oil supply will fail to keep pace with rising post-pandemic demand, it said in its World Oil Outlook (WOO) today.

Upstream capital expenditure (capex) fell by 28pc on the year in 2020 to $240bn as oil companies cut spending to ride out the Covid-related oil price collapse, according to consultancy Rystad Energy. The pandemic has also spurred further momentum towards environmental, social and governance (ESG) policies, which could make fossil fuel investments more expensive, the WOO said.

But there are still "considerable doubts" as to whether global decarbonisation ambitions will be met in their proposed timeframes, Opec said. As a result, the report's reference case still sees oil demand growing in the short and long terms, and for the fuel to retain the largest share in the energy mix at 28pc in 2045. This is little changed from last year's estimate and down by just 2 percentage points from its 2020 share.

The WOO's short-term oil demand outlook is little changed from last year's estimates, rising to 103.6mn b/d in 2025 from 90.6mn b/d 2020. But Opec sees long-term demand slightly lower at 108.2mn b/d in 2045 compared with 109.1mn b/d previously.

Much of the demand growth materialises in 2021-23 as part of the recovery process from the Covid-19 pandemic, but there will be "virtually no growth" after 2035, suggesting a relatively long period of plateauing oil demand. OECD countries' oil demand is unlikely to recover to 2019 levels and will peak at around 46.6mn b/d in 2023 because of increasing emphasis on a low-carbon future. But non-OECD demand will continue rising, to 74.1mn b/d in 2045 from 48.6mn b/d in 2020.

Cumulative investment requirements in the global oil sector amount to $11.8 trillion over the 2021-2045 period, of which upstream accounts for 80pc. The bulk of this will go to the US, helping drive non-Opec liquids supply above pre-pandemic levels of 65.5mn b/d next year, Opec said. It sees US tight oil peaking at around 15.2mn b/d towards the end of the decade — around 600,000 b/d lower than expected in last year's estimates — and for US total liquids to peak at 20.5mn b/d at a similar time.

The report also sees production falling from maturing producers such as post-peak Norway, China, Azerbaijan and the UK, resulting in non-Opec liquids supply declining from 70.4mn b/d in 2026 to 65.5mn b/d in 2045 — in line with 2019 levels. Consequently, Opec members will be relied on to meet oil demand in the longer term, the report said, adding that Opec member countries remain committed to supporting upstream investments.

And Opec+ members can tackle any potential investment-related supply tightness in the short term through spare capacity, even as they gradually unwind production adjustments made under the latest agreement. This comes despite warnings from Saudi Arabia's oil minister Prince Abdulaziz bin Salman that capacity for some Opec+ members has stalled or even declined since they agreed the deal last year and that they may not be able to produce their share of the quota increase.

Opec said that the investment debate has been partially triggered by the IEA's net zero by 2050 emissions roadmap, which suggested that one route towards achieving net zero emissions by 2050 would be a freeze on new oil and gas exploration.

"Opec's WOO 2021 continues to call for upstream investment to be sustained given that oil demand continues to expand over most of the forecast period," the report said, adding that with the "likelihood of a supply crunch on the horizon quite low, undue pessimism may not be helpful."

Opec expects that commodity markets' cyclical nature will ensure that high prices resulting from any supply shortfall will stimulate investment again, adding that "market mechanisms will ensure that it is attractive to invest in the required upstream capacity". If the ESG investment trend develops at a more rapid pace, or if necessary investment does fail to materialise in the coming years, then Opec says its opinion "may need to be revisited".

By Rowena Edwards