If anyone thought the latest oil market outlooks of the EIA and the IEA are upbeat, here’s an even more upbeat one from Energy Aspects: The consultancy expects crude demand this year to grow by 1.7 million bpd, and says Brent could touch above $100 a barrel in 2019.
According to Energy Aspects, the reason for the further jump in prices will be a drop in new production outside the U.S. shale patch. It’s a little hard to buy that, however, if one remembers that there is 1.8 million bpd in production capacity ready to be tapped again once OEPC and Russia taper their production cuts. That alone should take care of the demand growth that the consultancy predicts for this year. That is, unless it booms by 2 million bpd, which is the top of the range forecast by Energy Aspects. But even then, the U.S. and Russia alone could take care of it: The Russian state majors are itching to expand production in eastern Siberia.
Of course, the likelihood of OPEC and Russia bringing all that production online is highly debatable, as the partners in the cut deal seem still determined to continue with the original plan. Nevertheless, the barrels are there, so there’s no urgent need for actual new production yet. However, if global demand grows so much so quickly, does anyone have any doubts that the new, expanded oil cartel will be flexible enough to make the best of the situation? Hardly.
So how likely is this demand growth? According to Energy Aspects, there is currently “no real drag on demand growth.” The global economy is in growth mode, which lends strong support to the price momentum, and the short-term forecasts for the top consumers of crude oil are all bullish. Yet, there’s one potential drag: prices. Related: The Biggest Year Yet For U.S. Shale
Here’s what Bloomberg Gadfly’s Julian Lee says: “Rising prices can have a chilling effect on demand growth, and benchmark crude prices have risen more than 55 percent since their rally started in June. End-user retail prices are feeling this.”
But that’s not all. While Lee acknowledges that higher prices at the pump will affect demand in Europe and North America, the effect of more expensive fuels will be much more palpable in developing nations, which are the main drivers of global growth, after all. There, Lee notes, governments used the oil price slump to reduce fuel subsidies, and now that prices have started climbing up again, the end-user price jump will be much higher. This will inevitably interfere with economic activity, potentially undermining that growth everyone is talking about.
And then there’s gas — the bridge fuel, the alternative. Both countries and oil majors are investing a large percentage of total capex in natural gas production and infrastructure, with China as the best example. Gas is cheap, the market is oversupplied and unlikely to swing into a deficit anytime soon, given the number of large-scale LNG projects in Australia coming online. True gas-fueled cars are few, and car fuels account for the biggest portion of oil demand. But higher prices are higher prices. Too high, and people start using public transport if it’s available. Related: Saudis Unmoved By Oil Price Surge
But let’s forget about prices at the pump and the switch from oil to gas. Let’s talk about that economic growth that the IMF forecast in its latest World Economic Outlook and that so many consultancies are also predicting. There are voices being heard — including from the IMF itself — that the next recession is not far away.
In fact, according to some, such as Forbes’ Michael Lynch, a recession is pretty close by. Lynch uses an indicator he calls “more money than brains” to anticipate recessions. Describing it as “conspicuously ridiculous consumption”, he exemplifies it with the current fad of raw water. He also notes that the U.S. stock market is at historic highs. It is time for a correction, Lynch says, and he is not the only one. With a correction in stock markets and a slowdown in the economy of the world’s largest consumer, what are the chances of Brent hitting $100 a barrel? Slim.
By Irina Slav for Oilprice.com
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Still, oil prices are heading to $100 and even higher by 2020. In my opinion, a price ranging between $100 and $130 is a fair price for oil.
The OPEC/non-OPEC production cuts are not actually 1.8 mbd because since the agreement was implemented in January 2017, Libya’s production has increased by 400,000 barrels a day (b/d) and Nigeria’s by 200,000 b/d both of whom were exempt from the agreement. Therefore the actual production cuts were in fact 1.2 mbd.
Russia can add some 300,000 b/d if it disentangles itself from the production agreement, which it will not do yet. And US shale oil could add some 700, 000 b/d, a total of 1 mbd from both the US and Russia. In such a situation the market would be fully re-balanced which will give a great impetus to oil prices.
As for shifting to gas in transport, this is a non-starter since gas prices are indexed to oil prices. When oil prices go up, so do gas prices. However, rising oil prices could give a push for a wider electric vehicle use but this lies further in the future.
Of course, recession is always a possibility but we will cross that bridge when we come to it.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Why do you think OPEC and Russia will be so eager to release their spare capacity when oil prices are going up?? OPEC(Saudi, Kuwait and UAE) had increased production to unsustainable levels before they announced the cut which brought them back to where production was nine months earlier. Yes…they have spare capacity but that is for supply disruptions. Don’t count on them using spare capacity just because the market is tightening.
"You didn't even MENTION depletion..."
Exactly, and this is especially true in regard to the remaining supply of Cumulative Net Exports of oil (CNE).
For example, Mexico probably showed about a 50% decline in their net oil exports (total petroleum liquids) from 2016 to 2017, and if they show a similar production decline in 2018, they will probably be a net oil importer by the end of this year.
And although Saudi Arabia showed an increase in total petroleum liquids production from 2005 to 2016, their net exports have been below their 2005 rate for 11 straight years through 2016 (BP data). Based on the 2005 to 2016 rate of decline in the Saudi ratio of production to consumption (what I call the ECI Ratio, Export Capacity Index Ratio), I estimate that Saudi Arabia has already shipped about half of their total post-2005 supply of CNE.
And looking at global data, I estimate that globally we have already consumed more than half of the post-2005 supply of Global CNE available to importers other than China & India.
In other words, depletion marches on.
There is no opec tap that they can open. just follow the rig counts and the production they result. All declines.
OPEC and Russia don't have 1.8 m of capacity, if you look at cuts versus q2/16 its more realistically 0.6