The rules of the global oil market are being rewritten, forcing oil producers and oil economies to react to the 50% drop in crude prices, the International Energy Agency says.
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“OPEC has torn up the book on supply management,” Maria van der Hoeven, the IEA’s executive director, said in a foreword to the agency’s medium-term oil market forecast published Tuesday. “Companies have taken an axe to budgets. Exporting countries are struggling with financial gaps. Upstream investments have been scaled back.”
In what it calls a “business-as-unusual” outlook for oil in the medium term, the IEA said “the market rebalancing will likely occur relatively swiftly but will be comparatively limited in scope, with prices stabilising at levels higher than recent lows but substantially below the highs of the last three years.”
The IEA expects crude prices to average US$55 per barrel this year, rising to US$73 per barrel by 2020, but the relatively low prices would see demand outpacing supply by a million barrels per day. While that may create market conditions for a price jump in the next decade, the oil industry is faced with a medium-term downturn that is structurally altering markets.
The Canadian oil industry will also be challenged by the rapidly changing landscape, with the IEA slashing the country’s oil production growth forecast by 430,000 barrels per day – 10% of current production – by 2020.
The Paris-based energy watchdog now expects Canadian oil production to grow by 810,000-bpd to reach just under five million barrels per day over the next five years.
While Canadian oilsands projects that have already seen capital commitments will proceed, new projects “are unlikely to be sanctioned and will likely be delayed,” the IEA said. “Companies will be much more restrained in committing cash to fund expensive projects in the current price environment.”
“Oil sands projects, with long pay-back time, are on the opposite end of the price-sensitivity spectrum compared to [U.S. light, tight oil] producers,” the IEA said.
“Most of Canada’s upstream projects have long lead times, and once cancelled or postponed, oil sands projects cannot be brought online quickly in response to increasing prices.”
Quoting from Oslo-based consultancy Rystad Energy, the IEA expects Canadian exploration and production capital spending in 2015 to come in at US$79-billion, before increasing in each of the following years through 2020.
Planned investments in oil sands projects would stand at US$37-billion before reaching US$88-billion by the end of the forecast period, as price stabilizes.
“The drop in investments in the near term is price-driven as companies cope with oil prices around US$50 per barrel. However, Rystad Energy assumes a rebound in prices in 2016 and beyond, leading to an increase in capex.”
The IEA has pared its previous bullish oil forecast for North America, but the continent will remain the top source of non-OPEC incremental supply at least till 2020.
In sharp contrast, Russian, Colombian and Norwegian production will contract during the next five years. Indeed, Moscow is the biggest casualty of the price fall, the IEA says.
“Russia, the second-largest non-OPEC liquids producer, is expected to swing into contraction over the medium term due to the crushing impact of lower oil prices and Western sanctions,” the agency said.
Meanwhile, the Saudis may also find themselves squaring up against Canadian heavy oil in the U.S. Gulf Coast and West Coast market. Canadian heavy oil has already displaced other imported crudes, and Saudi Arabia “could price its crudes aggressively” to protect its market share in the U.S.
“Recent tanker tracking information also suggests that shipments to the U.S. West Coast have picked up, which could see the Kingdom increasingly target this market to offset any loss in flows to the Gulf Coast,” the IEA said in its report.
Canadian and Middle East crude from Saudi Arabia, Iraq and potentially Iran, would also likely butt heads to capture the increasingly well-supplied Asian markets.
Despite pipeline constraints, Canadian crude has already begun to reach refineries in China, India, South East Asia and Europe, “and these are set to become more frequent over the forecast period.”
Canadian crude, including re-exports from the United States, will likely reach Pacific Basin markets by rail or ship if the economics support it.
“Should at least one of the planned pipelines be approved and completed before the end of the forecast, however, Canadian exports could steeply increase,” the IEA said.
But the new supplies are entering the market as global demand patterns are shifting. Emerging economies, led by China, had unleashed a decade of near-vertical demand growth, but they are now entering a less oil-intensive stage of development.
China’s share of global demand will shrink to 25% by 2020, compared to its current level of 35%, the IEA estimates.
The changing dynamics in the global oil market will leave plenty of uncertainty as producers and investors contend with many moving parts.
While advances in information technology have made businesses less fuel-intensive, concerns over climate change are also recasting energy policies.
“And the globalisation of the natural gas market, coupled with steep reductions in the cost and availability of renewable energy, are causing oil to face a level of inter-fuel competition that would have seemed unfathomable a few years ago,” the IEA said.