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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2019

Vol. 24, No.11 Week of March 17, 2019

Changing world for oil

IEA sees major global oil market changes as US production surges, demand shifts

Alan Bailey

Petroleum News

On March 11 the International Energy Agency published Oil 2019, this year’s edition of the agency’s annual review of the global oil market. The report says that the market is going through “a period of extraordinary change,” as the United States plays an increasing role in expanding global oil supplies, while demand growth continues to move away from developed countries towards Asia, and more towards the production of petrochemicals. New standards for marine fuel that will come into play in 2020 will also require a significant shift in refining capacity, the report says.

Thanks primarily to the shale oil revolution, U.S. oil production increased by a record 2.2 million barrels per day in 2018. The IEA anticipates this trend continuing into the 2020s, albeit at a slowing growth rate. With an increase of 4 million barrels per day, the United States will account for 70 percent of the global increase in production capacity through to 2024, the report says. While Iraq and the United Arab Emirates are the only OPEC countries with plans for significant increases in production capacity, production gains from these countries are being offset by sharp losses in production from Iran and Venezuela: Iran is impacted by trade sanctions while political and economic turmoil in Venezuela is severely impacting that country’s oil industry.

US net exporter

The IEA predicts that the United States will become a net oil exporter in 2021, with the country’s exports potentially increasing to 9 million barrels per day by 2024. The result would be that U.S. exports would overtake those of Russia and would come close to catching up with those of Saudi Arabia. Brazil would see the second highest increase in crude oil exports after the Unites States, with the potential to increase exports by 0.8 million barrels per day over the same time period. A renaissance in the Norwegian oil industry will likely result in that country’s supply growth exceed those of Kazakhstan and Kuwait in the next five years, the report suggests.

The increase in oil supplies, to meet growing demand, will require continuing investment in new oil production for the foreseeable future, especially as production from existing oil fields declines. The IEA has worked out that, based on the agency’s analysis of oil field decline rates, the equivalent of the entire output of the North Sea oil industry would need to be offset each year, just to keep global oil production steady. This will require substantial investment and the possibility that investment in conventional oil assets could increase faster than investment in shale oil, the report says. After higher than expected spending in 2018, capital expenditure in the upstream industry should increase by 4 percent this year, the IEA suggests.

Slowing demand growth?

The report cautions that the rate of demand growth may be impacted by a slowing of global economic growth - the International Monetary Fund has downgraded its short-term economic growth outlook, while trade disputes and uncertainty over Brexit may impact the near-term growth outlook. The consequence may be a growth in oil demand “at a more measured pace,” with the rate of growth gradually slowing over the next five years, the report suggests.

Key to oil demand growth will be continuing economic expansion in the developing world, in particular in China and India. Despite a recent slowdown, China’s economy is still growing steadily. As income levels in the country rise, oil demand is tending to shift from heavy industry towards consumer needs. India’s economy is now growing faster than China’s: India’s oil demand is expected to reach the same level as China’s by 2024, the report says.

Increasing consumer affluence around the world will drive a need for more plastics and, hence, more petrochemicals. Thus, despite concerns about the environmental impact of plastics and encouragement for plastic recycling, there is strong demand growth for plastics and petrochemicals. The IEA says that it has identified more than 50 major petrochemical projects expected to come online through 2024. These projects would likely add 2.2 million barrels per day to global oil consumption, thus accounting for 30 percent of global oil consumption growth.

There is, however, increasing uncertainty through the five-year forecast period, with the possibility of more projects and higher oil demand towards 2024.

Transportation fuels

The report comments on the high rate of growth in the aviation industry in recent years, with a buoyant travel industry driving a rapid increase in the number of passengers. The IEA anticipates continued strong growth, as incomes rise in developing countries, more airports are built and airline fleets expand. The agency expects 75 percent of this growth to take place in India, with China driving the largest rise in demand while India shows the highest rate of growth.

On the other hand, the increasing fuel efficiency of gasoline-fueled vehicles will slow the rate of growth in global gasoline demand to less than 1 percent per year, although the rate of demand growth in developing countries will likely double this figure, as more vehicles come into use.

The report comments on the huge impact of new international regulations mandating low sulfur fuel oil in the shipping industry, starting in 2020. The oil refining industry, having been given several years notice of this change, is in a position to make the necessary adjustments to fuel supplies. However, initially there will be a tight market, with most supplies coming from the United States, the Middle East and China. The IEA expects the demand for high sulfur fuel oil to plummet, although there may be some use for this fuel in power generation, especially in the Middle East. There will, however, be sufficient marine gasoil to plug the fuel supply gap, with new low-sulfur fuel oil also becoming available over time.

Changing refining mix

Oil refiners will face other challenges in dealing with the changing global market for oil products, the report says. While global oil consumption growth may increase by 9 million barrels per day between now and 2024, China will likely overtake the United States as the leader in installed refining capacity. But since the anticipated new capacity will actually exceed the increase in demand for refined products, it may be necessary to close some refineries to rebalance the market, the report says.

There is also an interesting issue relating to the changing mix of crude oil types being produced and the changing demands for different types of refined products. Production cutbacks and geopolitical issues are reducing the availability of heavier crudes, while a reduction in demand for fuel oil and growth in petrochemicals are driving a need for lighter refined products. The United States is in a particularly advantageous position to supply the lighter types of crude that are increasingly needed, with low-sulfur shale oil helping meet the need for new marine fuels and for naphtha for the petrochemical industry, the report says.






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