Oil shortage ahead?

Aramco: supply crunch on under-investment; IEA, OPEC pare recovery views

Steve Sutherlin

An oil shortage may be in the works due to underinvestment in the energy sector and rising demand, Saudi Aramco CEO Amin Nasser said Oct. 13.

“There is a concern that we might end up with a supply crunch over the mid to long term if this level of investment is not corrected looking forward,” Nasser said in remarks to the Energy Intelligence Forum.

Nasser’s remarks came as the International Energy Agency and the Organization of Petroleum Exporting Countries separately released revised projections which reflected an incremental bearish shift in outlook for oil market recovery.

Nasser said demand is recovering from the coronavirus pandemic slump.

“The worst is definitely behind us,” Nasser said. “We are seeing a recovery; most of the demand comes from the developing countries. We see a big pickup from East Asia - especially China.”

Aramco slashed its 2020 investment by $8 billion, versus 2019 spending of $25 billion to $30 billion.

Global energy investment this year is set to fall by 18%, the IEA said in its 2020 World Energy Outlook - released Oct. 13.

Global energy demand in 2020 is poised to fall 5%, led by an 8% drop in oil demand and a 7% drop in coal use, the agency said, adding that natural gas demand is set for a 3% drop and global electricity demand is expected to fall only 2%.

In its report, the IEA advanced a 10-year scenario in which COVID-19 is brought under control and the global economy rebounds to pre-crisis levels in 2021.

An alternate “delayed recovery scenario” reflects a prolonged pandemic with the economy returning to pre-crisis size in 2023, under which the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.

Pre-crisis, energy demand was projected to grow by 12% between 2019 and 2030, but the projection now has fallen to 9%, and to only 4% in the delayed recovery scenario.

In both scenarios, oil demand flattens out in the 2030s, but in a delayed recovery, an additional 4 million barrels per day comes out of the projections, holding total demand under 100 million bpd.

Behavioral changes resulting from the pandemic cut both ways, the agency said.

The longer the disruption, the more some changes become ingrained, such as working from home or avoiding air travel, it said. However, oil consumption benefits from a near-term aversion to public transport, the popularity of SUVs and the delayed replacement of older, inefficient vehicles.

Absent a larger shift in policies, it is still too early to foresee a rapid decline in oil demand, the IEA said, adding that rising incomes in emerging market and developing economies portend strong underlying demand for mobility, offsetting reductions in oil use elsewhere.

Oil use for cars peaks in both scenarios, due to continued improvements in fuel efficiency and sales of electric cars, while oil use for longer-distance freight and shipping varies according to the outlook for the global economy and international trade, the agency said.

Oil demand will increasingly depend on its rising use as a feedstock in the petrochemical sector, it said.

“With demand in advanced economies on a declining trend, all of the increase comes from emerging market and developing economies, led by India,” the agency said. “The slower pace of energy demand growth puts downward pressure on oil and gas prices compared with pre-crisis trajectories, although the large falls in investment in 2020 also increase the possibility of future market volatility.”

OPEC trims growth projections

The decline reflected a softening recovery of physical crude market fundamentals, bearish sentiment in the crude oil futures market amid new COVID-19 cases globally, and concerns about demand.

Moving with other benchmark crudes, the OPEC reference basket value softened in September by $3.65 to $41.54 per barrel, down by 8.1%.

Hedge funds and other money managers were less bullish on the oil price outlook in September and were net sellers of about 113 million barrels of crude in both Brent and West Texas Intermediate, OPEC said, adding that the Brent and WTI futures markets moved into a steeper contango.

The expected recovery in transportation fuel demand over the summer driving season disappointed, requiring a downward demand revision to Europe and the Americas for the second half of 2020.

Better-than-expected data from China, showing gains in industrial fuel use, “more than offset some of the losses seen in other regions,” OPEC said.

In 2021, the world oil demand forecast was adjusted lower by 0.08 million from the previous month’s report due to the slower economic growth projections.

The OPEC forecast for 2021 oil demand growth is now 6.5 million bpd, with global total demand estimated to reach 96.8 million bpd.

All products are projected to see growth, given the current year’s low demand levels, OPEC said.

“Oil demand growth in 2021 is expected to be capped by a number of factors, including the increase in teleworking and distance education; reduced international business and leisure travel; efficiency gains in the transportation sector; oil substitution policies in power generation; and reduced fuel subsidies,” it said.

On Oct. 13, Alaska North Slope, WTI and Brent crudes climbed further into the lower $40s after recent forays into the upper $30s, with ANS closing up 86 cents to $41.35 per barrel. Brent continued upward in Oct. 14 trading 98 cents to $43.43, and WTI rose 84 cents to $41.04.