Many of the assumptions analysts had previously relied on are just not true anymore.
Chief among them is a former belief that oil prices falling to twelve-year lows would lead to a spike in demand, a mass shut-in of high-cost production, and major producers cutting output.
In theory, then, this dynamic would bring prices back up. But now it’s starting to look like prices won’t recover quickly barring a major change in the world order.
“It is very tempting, but also very dangerous, to declare that we are in a new era of lower oil prices. But at the risk of tempting fate, we must say that today’s oil market conditions do not suggest that prices can recover sharply in the immediate future — unless, of course, there is a major geopolitical event,” the International Energy Agency wrote in its annual medium-term oil market report.
Basically, the IEA is saying that forecasts are hard to make confidently, but oil prices probably aren’t going higher anytime soon.
“The world of peak oil supply has been turned on its head, due to structural changes in the economies of key developing countries and major efforts to improve energy efficiency everywhere,” the report added.
A year ago, most folks were expecting the oil market to “balance” by the end of 2015. Of course, that did not happen.
And now, the IEA thinks that unless there’s an unexpectedly large drop in non-OPEC oil production in 2016 or a huge surge in demand, oil prices probably aren’t headed higher.
Looking five years ahead, the agency forecasts for oil demand to 2021 is for an annual average growth of 1.2 mb/d (1.2%), which is “solid” relatively to historical terms. Notably, they highlight that non-OECD Asia will remain the major source of demand growth going forward.
Meanwhile on the supply side of things, the IEA writes that in their base case outlook they expect US shale production to fall back by 600 kb/d in 2016 and by another 200 kb/d in 2017. But by 2021, they believe total US liquids production will increase by a net 1.3 mb/d compared with 2015.
As for OPEC, the IEA noted that the group’s oil export revenues shrank to $500 billion in 2015 from a peak of $1.2 trillion in 2012. And if oil prices stay are current levels, revenues will fall further to roughly $320 billion.
“It is not our role to analyse political issues, but it is worth flagging up the potential implications for supply stability in countries that have seen their income collapse dramatically,” the report wrote.
Still, the larger theme here is that today’s oil world is not what it used to be.
Here’s the IEA again (emphasis ours):
“In 2016, we are living in perhaps the first truly free oil market we have seen since the pioneering days of the industry. In today’s oil world, anybody who can produce oil sells as much as possible for whatever price can be achieved. Just a few years ago such a free-for-all would have been unimaginable but today it is the reality and we must get used to it, unless the producers build on the recent announcement and change their output maximization strategy.”
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