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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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Supply Crunch Or Oil Glut: Investment Banks Can’t Agree

In recent years, U.S. shale has thrown in another unknown in the mix of factors driving the price of oil. This year, shale output forecasts combine with OPEC’s production cuts, geopolitical factors, and unexpected outages to further complicate supply/demand and oil price forecasts by Wall Street’s major investment banks.

The biggest banks remain bullish on oil prices, expecting moderate price gains by the end of the year, even after last month WTI prices dropped below $50 for a couple of weeks.

But analyst projections about oil global supply and demand are increasingly diverging, because expectations of the combined effects of OPEC’s cuts, U.S. shale production, new oil discoveries, and new project start-ups also differ a lot.

Goldman Sachs, for example, expects a “material oversupply” in 2018-2019, due to the increase in mega projects production in 2017-19 as a result of the record spending in those projects between 2011 and 2013. Short-cycle shale output will also add to the glut, says Goldman, projecting an additional 1 million bpd to global supply by 2018-2019 coming from the mega projects sanctioned before the oil price crash and from U.S. shale output.

Morgan Stanley, however, begs to differ, and has recently said that “by 2020, we estimate that [around] 1.5 million bpd of demand will need to come from projects that have not been sanctioned yet, but that have break-even oil prices of $70-75 a barrel.”

UBS, for its part, expects a 4-million-bpd supply gap by 2020.

“Beyond 2017, the impact of a collapse in longer-cycle conventional investment over 2014-16 begins to be felt. 2015 saw just six major upstream projects totaling [some] 0.6 million bpd ... versus the 3-4 million bpd average, and 2016 has seen just one major liquids project sanctioned,” UBS strategist Jon Rigby told Reuters.

Analysts and industry bodies warn of a supply crunch, especially after 2020, when the effect of the significantly lowered investments in conventional projects during the downturn will show. The International Energy Agency (IEA) sees a shortage in oil supply after 2020, “unless new projects are approved soon”. According to the IEA, supply could lag demand in a few years, which could lead to a surge in oil prices. Related: Is The Oil Price Rally Running Out Of Steam?

“In the next few years, oil supply is growing in the United States, Canada, Brazil and elsewhere but this growth could stall by 2020 if the record two-year investment slump of 2015 and 2016 is not reversed. While investments in the US shale play are picking up strongly, early indications of global spending for 2017 are not encouraging,” the IEA said in a report last month.

According to Wood Mackenzie, although projects around the world slated for final investment decisions (FIDs) will double this year compared with 2016, and prospects for 2017 are largely looking good, “the longer-term deepwater pipeline is more challenged.

The oil price slump has not only deferred some investment decisions, it has also forced companies to scale back exploration spending for conventional oil.

Last year, total global discovered volumes of oil and gas combined hit their lowest since the 1940s, according to Rystad Energy. The Oslo-based consultancy sees exploration activity slowly picking up from 2018.

Although last year’s low discovery volumes won’t have an immediate effect on global supply, they could influence supply a decade or so into the future because of the long lead-time in sanctioning conventional oil developments and actual production start-ups.

Meanwhile, short-cycle U.S. shale is now more flexible in scaling back or resuming production, depending on the price of oil and well economics. This adds another conundrum for investment banks in predicting oil prices - how fast U.S. supply could grow and how many barrels it could add on the global oil market.

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Timmie Tee on April 12 2017 said:
    Oil needs to be about $60/bbl to support E&P budgets, and we've been below that for about two years-- so I can see a swing above $60/bbl as worldwide demand increases to 100bpd and supply from current projects is depleting at 5%/yr on average. Shale is only 5-10% of U.S. supply and it will not sustain a significantly higher level of production because it is 3x as expensive to setup and as interest rates inch up, will not be as easily financed.

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