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The Next Ten Years In Oil Markets

An eventful 2019 wraps up a decade of turmoil in oil markets, in which Brent Crude prices fluctuated from as high as US$125 a barrel in 2012 to as low as US$30 per barrel in January 2016.  

Geopolitical turmoil, economic growth, soaring U.S. shale production, and OPEC’s various policies to try to set the trends in oil prices marked the decade which is drawing to a close.

For the decade beginning in 2020, the key factors determining the price of oil are likely to be similar to those we have seen over the past decade, Andy Critchlow, Head of News, EMEA at S&P Global Platts, writes.

The state of the global economy, U.S. oil production and exports growth, and the OPEC+ alliance between the cartel and a dozen non-OPEC producers led by Russia will continue to influence the price of oil through 2030.

Geopolitical flare-ups and U.S. sanctions policies toward major oil producers, including Iran and Venezuela, will also shape the supply side of the market over the next few years.

On the demand side, the growing share of renewables in the energy mix and the increased use of electric vehicles (EVs) will begin to displace meaningful volumes of fossil fuel demand in power generation and oil demand in transportation over the next decade, many analysts say. Growing climate concerns may also start impacting investment decisions in new fossil fuel production, including oil.

The fundamental supply and demand picture will likely be ‘more of the same’, but the push and policies toward greener economies could be the new factor shaping oil markets and influencing oil prices over the next decade.

According to S&P Global Platts Analytics, alternative energy—including renewables, higher EV penetration, and hydrogen use—“will limit the overall call on fossil fuels.

“As we enter a new decade, the energy complex feels like it is all cascading towards a race to the bottom,” S&P Global Platts Analytics said in a research note. Related: Why This Oil Price Rally Won’t Last

Many forecasts predict oil demand peaking at around 2030 or in the 2030s. Global oil demand will reach its peak in the mid-2020s and flatten out in the 2030s, the International Energy Agency (IEA) said in its latest annual World Energy Outlook.

“Oil demand for long-distance freight, shipping and aviation, and petrochemicals continues to grow. But its use in passenger cars peaks in the late 2020s due to fuel efficiency improvements and fuel switching, mainly to electricity. Lower battery costs are an important part of the story: electric cars in some major markets soon become cost-competitive, on a total-cost-of-ownership basis, with conventional cars,” the IEA said in its outlook to 2040.

Unsurprisingly, OPEC continues to see oil as the fuel with the highest share in the global energy mix through 2040. The Organization of the Petroleum Exporting Countries expects EVs to hold a share of just 13 percent of the global car fleet in 2040 and sees the majority of the growth still coming for conventional internal combustion-engine vehicles.

OPEC has also been warning since the oil price crash in 2015-2016 that reduced investments in conventional oil after the price plunge will start to impact global oil supply in the 2020s. Through 2040, the world will need US$10.6 trillion in total investments in oil, OPEC said in its World Oil Outlook 2019 in November.

In the new decade, OPEC and its allies in the current OPEC+ pact will have to reckon with U.S. shale production, where growth is slowing these days as prices remain bound in a narrow range. But U.S. production will still grow in 2020, by more than 1 million bpd, according to nearly all major forecasts. U.S. shale production is expected to start declining in the middle or late 2020s, according to OPEC’s estimates.

The OPEC+ alliance will be tested as early as this coming March, when the partners are meeting to discuss how to proceed with their production cuts.

The coming decade will also test how (ir)relevant OPEC is on the global oil market, considering the supply growth from countries outside the production pact, the rising share of renewables and EVs amid falling technology costs, and growing concerns about climate change.

Global economic growth and recessions will undoubtedly also impact oil demand and oil prices over the next decade. So will the ever-restive Middle East with the Saudi-Iran antagonism and global powers vying for influence in a region home to one fifth of the world’s daily oil supply.

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on December 29 2019 said:
    I have always maintained that oil is like a coin. One side is economics and the other is geopolitics and the two are inseparable. That has always been the case throughout the history of oil except during the trade war between March 2018 and early December this year when some sort of de-escalation in the war started to develop.

    The reason is that the trade war has widened an already existing and relatively manageable glut in the market from 1.0-1.5 million barrels a day (mbd) before the war to 4.0-5.0 mbd. The glut was big enough to undermine OPEC+ production cuts, nullify the impact of geopolitics and outages on prices and even absorb the loss of half of Saudi production.

    The global energy scene for the next decade and the decades after will be governed by four pivotal principles.

    The first principle is that there will be no post-oil era during the 21st century and probably far beyond.

    The second principle is that there will be no peak oil demand either. While an increasing number of electric vehicles (EVs) on the roads coupled with government environmental legislations could decelerate the demand for oil, EVs could never replace oil in global transport throughout the 21st century and far beyond.

    The third principle is that an imminent energy transition is an illusion. And the fourth principle is that oil and natural gas will continue to be the core business of the global oil industry for the foreseeable future.

    Oil prices in the decade beginning with 2020 will be determined by the above factors in the long term and by the following factors in the short term.

    1-An Acceleration of the slowdown in US shale oil

    Baker Hughes oil rig count has been telling a story of a US shale oil industry facing a steep oil rig count decline, confirmed production slowdown, declining well productivity and investments, bankruptcies and eventual demise. 2019 was the year in which the hype around US shale oil production finally burst. The US shale oil industry will be no more in 5-10 years.

    US production is over-stated by at least 2 mbd. This means that US oil production will average this year at 10.8 -11.0 mbd and around 10 mbd in 2020 and will continue to decline until its demise in 5-10 years from now.

    2-Saudi oil industry Is Now Hostage to the Houthis of Yemen & Iran

    If the Saudi-led war in Yemen continues in 2020, retaliatory attacks by Iran’s allies, the Houthis, might resume targeting the most sensitive oil installations particularly the Ras Tannura loading terminal, the biggest in the world. A successful attack on Ras Tannura could cripple Saudi oil exports.

    3- The Trade War

    The hope now is that the de-escalation of the trade war continues and ends in a permanent settlement. However, I doubt that there will ever be a permanent settlement of the trade war issue between the United States and China since the war goes far beyond trade. It is about the new world order in the 21st century and who will emerge as the dominant power in the world. Still, we could expect some truce between the two titans from which the global economy will benefit.

    4-A New Nuclear Deal with Iran

    There are small indications that President Trump could be inching towards a new nuclear deal with Iran.

    A moment of monumental importance for US-Iran relations took place a month ago when a high-level exchange of prisoners took place in Switzerland. The exchange of prisoners is being used by the United States as a fig leaf or a face-saving format to start negotiations with Iran. However, Iran will never accept any negotiations without a lifting of US sanctions against it first.

    5-OPEC+ Cuts

    OPEC+ current production cuts or any cuts in the future will hardly impact oil prices until the existing glut in the market which has been widened by the trade war into an estimated 4.0-5.0 mbd starts to decline steeply on continued de-escalation of the trade war.

    Meanwhile, the only impact the cuts have had so far is to reduce the market share and revenues of OPEC members. Still, OPEC will continue to exert considerable influence over the global oil market and prices well into the foreseeable future.

    6-Oil Prices

    Only a continued de-escalation of the trade war and continued soaring Chinese crude oil imports could enable oil prices to surge beyond $75 a barrel in 2020.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Camille Lage on December 31 2019 said:
    Dear Mamdouh Salameh,

    I am not sure of what you mean by your "three principle" : that you decided them to hold true, and believe that the heaven will listen to you ? Or that this is what you put your faith in, and would feel betrayed if they turned wrong ? I mainly suspect that you call them "principles" because you have no way to prove them !

    Anyway, the only principle I know is that nobody is stupid enough to pay more to get less. When electric cars will be cheaper than ICE, they will take 100% marketshare. Due to the fall in battery price, this will happen long before 2030 - a date when charging 200 miles in 10 minutes will be routine. When solar + battery will be cheaper than oil, oil is dead as a manner of producing electricity or heat. This will also happen around 2030.

    Of course, implementing the change will be slow. But before we get there, we'll know that we'll be there and BP, Total, Saudi Arabia and Venezuela will be broke.

    Best,

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