The current dramatic cuts in exploration and production will have a long-lasting impact on the global oil market, with oil prices spiking to above $68 a barrel in 2025, when there could be a supply deficit of 5 million barrels per day, Rystad Energy said this week.
“Even though the world is currently facing what is arguably the largest oil glut ever recorded, the tables will turn dramatically in coming years,” the energy research firm said.
As all oil companies moved into survival mode after the oil price crash in March, investments in exploration and new production are set to be delayed because companies are looking to preserve cash and avoid cutting dividends--something oil majors Equinor and Shell just did. So, global investments and project sanctioning activity are already drying up this year.
Due to the oil price crash, Rystad Energy expected at the end of March that exploration and production (E&P) companies were likely to reduce project sanctioning by up to $131 billion, or down about 68 percent on the year, compared to $192 billion in projects approved in 2019.
Muted investment levels and new project activity will combine with the rebound in global oil demand once the coronavirus crisis is over to swing the global oil market into a potential oil supply deficit of some 5 million bpd, according to Rystad Energy’s latest estimates. Oil prices would top $68 a barrel to balance the market, the consultancy said. Related: Goldman Sachs Predicts $51 Oil In 2021
The gap will be likely filled mostly by OPEC’s biggest producers – Saudi Arabia, Iraq, and the United Arab Emirates (UAE) – which could contribute a total of between 3 million bpd and 4 million bpd to fill the expected 5-million-bpd gap. The rest will likely come from U.S. shale.
In the U.S. shale patch, the response with investment and curtailments has been immediate with immediate effect on production, but the drastic cut of new wells will leave fewer such wells available for production in the long term, Rystad said.
“The current low oil price has tightened the medium-term supply and demand balance considerably,” says Rystad Energy Head of Upstream Research Espen Erlingsen.
“As demand is expected to recover, the core OPEC counties will need to increase their supply significantly or the market will face even higher prices than our base-case forecast,” Erlingsen added.
By Tsvetana Paraskova for Oilprice.com
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Permanent - that's the key word PERMANENT - destruction of oil capacity is taking place not only in the US shale sector (though the latter bears the brunt of it, to be sure), but in quite a number of countries, including Canada, Venezuela, Brazil, probably Nigeria etc.
In my view, a total annihilation of at least 5 M bbl/day from the world capacity is a pretty conservative guesstimate, and the kind of chronic deficit - around 5% at least - that the world is going to wake up to after all the dust settles and the smoke clears, and the accumulated excess has been soaked up by the market after coming back to normal demand, is gonna make the world pay dearly for the past decade of artificially low oil prices (courtesy of shale, which was governed not by the market but by the borrowing and indirect subsidies).
The problem will be compounded by the galling circumstance that this erasing of 5 M/day is going to be "super-permanent" in the sense that the substitution for this capacity is not going to be coming for years and years because after the shale bubble burst few crazy investors would even think about growth investment in oil - there was enough collective trauma caused by shale which was born a zombie, has stayed a zombie and is dying a zombie.
It will take months to destroy the supply (and demand), and it may take a year for the demand to restore, and it can easily take a decade to restore the supply