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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Is An Oil Price Spike Inevitable?

Oil Rig

The oil glut is over, at least when it comes to U.S. commercial inventories: over the past two months they have been within the average range for the season, thanks to hefty draws. These draws, one analyst argues, are a signal of higher-than-expected demand that is not only an American trend but a global one.

Judging by recent price movements, Flynn is hardly an exception: Brent touched $70 last week, a level only the most bullish of the bulls hoped to see at this time of the year as doubts about OPEC and Russia’s ability to offset growing American production persisted. Now, with new discoveries continuing to sit at record lows, there is a chance that $70 a barrel is only the beginning—as long as demand delivers on expectations, that is.

For now, global crude oil demand forecasts seem to be overwhelmingly positive. The EIA, in its latest Short-Term Energy Outlook, forecast global oil consumption growth of 1.7 million bpd this year and a bit less in 2019.

The International Energy Agency is a bit more guarded, forecasting in its latest Oil Market Report an average demand growth rate of 1.3 million bpd for this year. This would be a slowdown from last year’s 1.5 million barrels daily, but still a robust growth rate, in spite of the wider adoption of EVs and the increase in renewable power generation capacity.

Related: 5 Energy Sector Predictions For 2018

If these forecasts turn out to be accurate—the oil market is notoriously difficult to predict—then we could see a real price spike before too long. In fact, we could see a deficit at some point in the future, according to Flynn, who estimates that the one-trillion-dollars in exploration investments that fell victim to the 2014 price collapse could cause a global production drop of between 8 and 11 million barrels per day.

Flynn likens this scenario to one of today’s top three producers—Russia, Saudi Arabia, or the United States—stopping production entirely. But in reality, this drop-off in production—if it materializes, will not be as sudden as if Saudi Arabia or Russia turned off the taps—it would be a gradual drop off. In fact, given the right circumstances, it could be so gradual that its impact on oil prices could be minimal.

This, however, is a scenario neither producers nor the renewable energy sector would favor. Both camps are interested in higher prices, albeit for different reasons. Higher oil prices would help oil-dependent producers make ends meet and even turn in a profit at some point. They would also make renewables more attractive, including in the EV sector and in power generation.

Related: 3 Million Barrels Per Day Could Go Offline In 2018

The latest demonstration of this link between fossil fuel prices and renewables adoption came from Australia: the country added a record-high amount of solar power capacity last year amid higher electricity prices, which were caused by lower supply of coal and natural gas—the fuels that generate most of Australia’s electricity at the moment.

Is an oil price spike inevitable? It’s too early to say, despite those investments that never materialized. OPEC and Russia, as well as their smaller partners in the production cut, are capable of bringing back online the 1.8 million bpd that they have choked off. The bulls may have to wait a while longer for a further price spike.

By Irina Slav for Oilprice.com

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  • Frank the Tank on January 15 2018 said:
    The average for commercial stockpiles 2nd week of January is 400M barrels? Since when?
  • Mamdouh G Salameh on January 16 2018 said:
    Oi prices are destined to rise significantly in coming months boosted by growing global oil demand estimated at 1.7 million barrels a day (mbd) in 2018 compared with 1.5 mbd in 2017 and an almost re-balancing in the global oil market.

    Industry experts are predicting a supply gap and rising oil prices by 2020. This is due in large part to an oil investment drought marked by three years of consecutive decline in oil prices, a statistic that has no precedent in the oil industry. They estimate that some 15 mbd of new oil supply may be needed by 2020 to meet rising oil demand averaging 1.6 mbd annually and also offset an annual natural depletion rate in global oil production estimated by the IEA at 5% or 4.8 mbd, virtually equivalent to current oil production of Iraq, OPEC’s second largest oil producer.

    The oil industry desperately needs new sources of oil, and they need to find those sources quickly.

    Therefore, I would not be surprised if oil prices rose far beyond $70/barrel this year and further more by 2020.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Oilracle on January 16 2018 said:
    OPEC wanted to kill US oil production by pumping out more oil, but they had not succeeded.
    Now OPEC countries are pumping less to kill a few among themselves, will they succeed in that?

    Higher oil prices are more significant for the US coal production, which could really give some life to the EV market.
  • Robert Craig on January 16 2018 said:
    "But in reality, this drop-off in production—if it materializes, will not be as sudden as if Saudi Arabia or Russia turned off the taps—it would be a gradual drop off. In fact, given the right circumstances, it could be so gradual that its impact on oil prices could be minimal."

    Thanks for the article. This paragraph is illogical. An 8-11m bopd reduction would be like Saudi turning off their taps over a period of time. General consensus is that global depletion runs at between 3-5m bopd - this means that 3-5m bopd must be REPLACED every year just to stand still (i.e. before you even consider growth in demand). If a trillion dollars of investment has not been made since 2014 then the failure to replace the normal depletion rates would indeed be like Saudi turning off the taps over a 2-3 year period.

    Until now, the shortfall has been made up by projects where sunk costs meant that it was better to continue to production even at a loss. US shale is currently at 5m bopd. It needs to DOUBLE this year, just to cover the global depletion deficit caused by lack of investment since 2014.

    An almighty oil price shock is coming. Its just a question of when.

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