Providing coverage of Alaska and northern Canada's oil and gas industry
March 2018

Vol. 23, No.10 Week of March 11, 2018

IEA report points to buoyant oil demand

Says that more investment will be needed to ensure adequate supplies after 2020; US expected to be prime player in oil production

Alan Bailey

Petroleum News

Predominantly because of strong economic growth in Asia, global oil demand will increase by some 6.9 million barrels per day to 104.7 million bpd by 2023, according to the International Energy Authority’s Oil 2008 report, the agency’s latest five-year forecast for global oil markets.

The report says that, although current supply growth can keep up with supply needs through 2020, more investment will be needed to support production after that year - the world has yet to recover from a major drop in investment in 2015-16. Oil production in the United States will, thanks to the shale oil revolution, support a significant proportion of the demand growth - there is currently little increase in spending in the upstream oil industry outside the United States, IEA says.

“The United States is set to put its stamp on global markets for the next five years,” said Dr. Fatih Birol, IEA executive director. “But as we’ve highlighted repeatedly, the weak global investment picture remains a source of concern. More investment will be needed to make up for declining oil fields - the world needs to replace thee million barrels per day of declines each year, the equivalent of the North Sea, while also meeting robust demand growth.”

Excess stock disappearing

Currently the excess in global oil stocks that has characterized the last few years has almost disappeared, resulting in a recovery in the oil price, the report says. The oil price rally, in turn, has fueled a new wave of production growth in the United States. This growth, coupled with production growth in Brazil, Canada and Norway, can meet demand through 2020, the IEA report says.

At the same time, the International Monetary Fund has predicted a global economic growth rate of 3.9 percent in 2018 and 2019, leveling to about 3.7 to 3.8 percent per year in 2020 to 2023. Developed countries show strong growth, with tax cuts in the United States likely to drive annual growth of 2.7 percent in 2018 and 2.5 percent in 2019 before slowing in response to eventual fiscal adjustments. Growth in Europe and Japan remain strong.

But growth will likely be particularly strong in China and India, averaging out somewhere between 6.3 and 6.5 percent per year.

Strong economies will require more oil, particularly as feedstock for the petrochemical industry. Hence the projected growth in oil demand between now and 2023. The IEA expects China and India to continue to account for nearly 50 percent of global oil demand. However, the rate of demand growth in China is likely to slow, as the Chinese economy becomes more consumer oriented, the IEA report says.

Changing demand mix

In China, government recognition of the need to tackle poor air quality in cities is driving stringent fuel efficiency and emissions regulations. Sales of electric vehicles are rising and there is increasing use of natural gas as a transportation fuel, especially for trucks and buses.

On the other hand, global economic growth is lifting more people into middle class lifestyles, a trend that is creating a rapid rise in demand for consumer goods and services. That, in turn, fuels an increasing demand for chemicals derived from oil and gas, for the manufacture of a wide variety of products that support more affluent lifestyles. Ethane and naphtha, two chemical feedstocks, account for about one quarter of the IEA’s projected growth in oil demand by 2023.

Slow investment recovery

Meanwhile investment in new oil production has barely recovered from the sharp drop in investment that resulted from the fall in the oil price in 2014, the IEA report says. While investment was flat in 2017, early data for 2018 suggest only a slow rise. A concern is that investment is particularly focused on tight light oil production in the United States. The consequence of sluggish investment may be the squeezing out by 2023 of spare global production capacity, with the resulting possibility of increased oil price volatility, the IEA report says.

New investment will be the key to replacing production lost as existing oil fields decline, and to driving up production to meet growing demand. But the past three years have seen declining production in China and Mexico. Venezuela, with the world’s largest oil reserves, has seen production fall by more than half since former President Chavez came to power, with that decline expected to accelerate. Mexico, on the other hand, is instituting reforms that could see its production return to growth by 2023, the IEA report says.

U.S. role in production growth

With relatively slow production growth from the Organization of the Petroleum Exporting Countries, production from the United States will likely support oil demand growth through 2020. At some 3.7 million bpd, U.S. output growth, in particular light tight oil, will likely account for more than half of global production growth by 2023, and could go higher if oil prices rise above projected levels, the IEA report says. However, production of conventional non-OPEC oil will likely decline slightly between now and 2023, with growth coming from tight oil, oil sands and natural gas liquids, the IEA report suggests.

Demand for crude oil in Asia, in particular, will provide oil export opportunities for the United States, and export volumes from the U.S. have already increased sharply. The IEA expects current bottlenecks in shipping oil by pipeline from Canada and the Permian basin to ease, as new pipeline projects come to fruition. And U.S. crude export facilities are being upgraded.

However, although the U.S. shale oil industry can respond quickly to rising prices, OPEC countries will account for a major share of the oil supply, with spare production capacity in Saudi Arabia being particularly important in stabilizing world oil markets, the IEA report says.

Changing oil mix

Curiously, the emergence of tight light oil is driving a change in the crude oil mix, the IEA report says. Whereas a few years ago the assumption was that the oil mix would gradually trend towards an increasing proportion of heavier oil grades, the advent of light, tight oil development is pushing an increased proportion of light oil in the mix, with heavier oil production also growing, while the middle grades constitute a decreasing proportion of the overall production.

The IEA report also says that there is significant uncertainty associated with major changes to marine fuel specifications that the International Maritime Organization is mandating. The new regulations will drive a switch from high sulfur fuel oil to marine gasoil, or to a new very low sulfur oil, but it is not clear how successful the maritime and refining industries will be in implementing the changes. The changes will impact the mix of oil fuel products but will not significantly change the total demand for oil products, the report says.

Growing refinery capacity

Although the IEA report projects increasing global oil demand, the report also suggests that refining demand will slow, as electric vehicles and natural-gas fueled vehicles replace vehicles powered by liquid fuels, particularly in China, and as oil products from natural gas fractionation substitute for refined products. However, global refining capacity is growing - the IEA expects excess refining capacity to put pressure on refining margins. The Middle East will likely see the biggest growth in refining capacity, with China and other Asian countries also seeing strong growth, the IEA report says.

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