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The Bullish EIA Message Markets Have Overlooked

U.S. shale hasn’t just introduced…

Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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OPEC May Be Powerless To Stop Lower For Longer

Just a few months after oil prices began to crash from its US$100 level in 2014, BP’s chief executive Bob Dudley warned the industry that it needed “to prepare for lower for longer”.

At the beginning of 2017 - with oil prices relatively stable at over US$50 for a couple of months now - the UK oil supermajor said it in its 2017 Energy Outlook edition that oil resources are abundant, and those that are known today dwarf the expected global consumption of oil out to 2050 and beyond.

In BP’s predictions for a future world in the next 20-30 years, the abundance of potential oil reserves and supply may lead to low-cost producers pumping “ever-increasing amounts of that oil and higher-cost producers getting gradually crowded out”, group chief economist Spencer Dale said. This abundance of oil resources contrasts with expectations of slowing growth of oil demand, Dale noted.

BP’s supply-demand expectation suggests that oil prices may not only be lower for longer, but that they may be lower for even longer.

Low-cost oil producers may try to use their competitive advantage to increase market share, BP said, and they may be tempted to pump more oil before the demand growth starts to abate.

This may lead to “quite significant pressures to dampen long-run prices”, Dale commented in a presentation of BP’s outlook, as quoted by the Financial Times.

According to BP’s latest energy outlook (which, of course, should not be viewed as the ultimate authority on global oil outlooks and dynamics), cumulative oil demand until 2035 is seen at around 700 billion barrels, significantly lower than recoverable oil in the Middle East alone.

BP has pegged demand for global liquids – including oil, biofuels and other liquid fuels – rising by around 15 million bpd by 2035, to reach 110 million bpd by then. OPEC is expected to account for almost 70 percent of the world’s supply growth, with supply increasing by 9 million bpd to 48 million bpd by 2035. On the other hand, non-OPEC supply is expected to grow by just over 4 million bpd by 2035. U.S. liquids output is seen rising by 4 million bpd to reach 19 million bpd by 2035, with the highest growth expected mainly in the first half of the period, pushed up by tight oil and natural gas liquids production. Related: Robots Over Roughnecks: Next Drilling Boom Might Not Add Many Jobs

However, the expected growth in the U.S., as well as rises in Brazil, Russia and Canada, would be largely offset by declines in higher-cost and more mature producing regions. The result, according to BP: Middle East OPEC, Russia and the U.S. would raise their combined share of global liquids supply to 63 percent by 2035 from 56 percent now.

These oil supply-demand assumptions are part of BP’s ‘most likely’ path for energy—and in particular, oil—demand. There are three main variables on which global oil supply behavior would depend: the cost and feasibility of low-cost producers to significantly increase supply; the extent to which prices respond to increased supplies of low-cost oil and the impact on producers’ economies; and the ability of higher-cost producers to compete by amending tax and royalty regimes.

Broadly speaking in terms of energy demand, BP has identified three uncertainties for its ‘most likely’ energy scenario: faster mobility revolution, the speed of transition to lower-carbon economies, and risks to gas demand.

Although BP expects the number of electric cars to jump from 1.2 million in 2015 to around 100 million by 2035, it sees demand for cars from the growing middle class in emerging economies overpowering the effects of improving fuel efficiency and electrification. The implications of the rapidly growing EV fleet, at least in the base-case scenario, “aren’t a game changer”, Dale said. Related: Is The Oil Crisis Over? Oil Majors Report Positive Cash Flow

BP also admitted that renewables are the fastest-growing fuel source – with expected 7.6-percent annual growth - and sees continuing gains in competitiveness quadrupling renewables in power generation over the next 20 years.

So the inevitable question - when will oil demand peak - was also tackled in BP’s energy outlook. In its base-case scenario, the oil giant expects oil demand to start declining during the mid-2040s. However, this projection hinges on many factors. Slower than expected global GDP growth, faster fuel efficiency improvements, faster alternative-fuel vehicle mass adoption, or stricter climate policies may result in oil demand starting its drop much earlier, BP said.

The oil group’s base-case forecast for oil demand peak is generally in line with the International Energy Agency’s (IEA) World Economic Outlook 2016, which expects that global demand for oil will continue to rise until 2040, chiefly due to the lack of easy alternatives to oil in the road freight, aviation, and petrochemicals industries.

By Tsvetana Paraskova for Oilprice.com

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  • James on January 29 2017 said:
    It's a commodity. Fracking killed the cartel, and now they can only manipulate the price to the frack break even. Pretend all they want, that's all they can do.

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