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Page added on September 19, 2017

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IEA: Oil Price Spike Coming In 2020

Consumption

The halving of oil prices from $100 per barrel before 2014 down to just $50 today has led to a corresponding plunge in upstream investment. But even as benchmark prices seem to have stabilized over the past year, with most analysts predicting gradual and modest gains in the year ahead (depending on OPEC’s actions), there’s still no sign of a serious rebound in spending levels.

The problem of a shortage of supply seems very far off today, given the swift turnaround in U.S. shale and persistently high levels of crude storage.

But demand continues to rise—the IEA just upgraded its demand growth estimate for 2017 to 1.6 million barrels per day (mb/d). If that level of demand growth continues for a few years, it will more than devour the excess supply on the market. Even a more tempered growth rate would strain supplies toward the end of the decade, absent a corresponding uptick in production.

“There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices,” Neil Atkinson, head of the IEA’s oil markets and industry division, said at a conference in Bahrain. “There is at least a possibility of going back to the situation we had 10 years ago where oil prices were very, very high at a time when demand was growing.”

Atkinson warned that the market’s spare capacity—largely concentrated in Saudi Arabia—will dwindle as demand keeps rising at a time when supply remains stagnant. The market will tighten and OPEC will have to abandon its production limits in order to satisfy demand. After that, rising consumption could whittle away at the latent surplus capacity. At that point, the market will hit a supply crunch, which would likely result in higher volatility and higher prices.

Just like 10 years ago, spare capacity currently stands at about 2 mb/d. That certainly isn’t the lowest it has ever been, but it’s a relatively small cushion to fall back on in the event of a surprise outage, for example. That volume of spare capacity narrowed in the mid-2000s as the rise of China meant explosive levels of demand growth. When spare capacity fell to about 1 mb/d in 2008, the world saw a historic run up in prices.

The one difference between the mid-2000s and today, however, is that the market is sitting on near record levels of oil in storage, which will act as a sort of second form of spare capacity. It could take a few years to draw down those stockpiles.

On the other hand, unlike 10 years ago, the industry today isn’t spending huge sums to develop new sources of supply. In a 2016 report, the IEA estimated that the industry would need to bring online an additional 21 mb/d of new supply by 2025 just to keep current production flat, after factoring in depletion rates from existing projects plus higher demand levels. At the time of that writing, however, the industry only had about 5 mb/d of new supply in the pipeline, implying a gap of about 16 mb/d, a gap that showed little sign of being bridged.

Spending has increased a bit this year, but the IEA still warns that it is insufficient to meet future demand.

One big uncertainty that could ease concerns about a future supply crunch is the prospect of peak—or at least dramatically slower—demand, a notion that has recently gained currency. The projections regarding demand really run the gamut. The IEA tends to skew toward more business-as-usual assumptions, downplaying the effect of EVs on demand growth, resulting in forecasts that show relatively strong demand for years to come. Others, including Bloomberg New Energy Finance (which is bullish on clean energy) warn of a drop in oil demand as new technologies take over.

If you’re in the latter camp, then you aren’t worried about an oil supply crunch and a price spike over the next five years or so. Peak demand will mean permanently lower oil prices. But, if you’re going with the IEA, then the current spending drought on new oil projects could translate into a shortage by the early 2020s. The IEA plans on releasing detailed energy investment figures and forecasts on September 19.

energy collective



8 Comments on "IEA: Oil Price Spike Coming In 2020"

  1. Bob on Tue, 19th Sep 2017 4:45 pm 

    Never has 1 group, the IEA, been so wrong, for so long, and believed to be so right by so many for all that time. Listening to anything this group has to say is poison.

  2. MASTERMIND on Tue, 19th Sep 2017 6:17 pm 

    It Will Take 131 Years To Replace Oil, And We’ve Only Got 2 (Malyshkina 2010)

    http://www.businessinsider.com/131-years-to-replace-oil-2010-11

    http://pubs.acs.org/doi/abs/10.1021/es100730q

  3. brough on Wed, 20th Sep 2017 7:55 am 

    3 years for EVs to save the world economy.

  4. bobinget on Wed, 20th Sep 2017 3:02 pm 

    http://www.livecharts.co.uk/MarketCharts/crude.php

    Between a cheap dollar, dysfunctional WTI,
    missing Venezuelan CL much sooner.

    Can’t you see? Folks in single crop oil exporting states, can’t wait three more years for breakfast.

  5. MASTERMIND on Wed, 20th Sep 2017 7:19 pm 

    Cloggie look how BLM treats white woman?

    https://imgur.com/a/Opets

  6. Anonymous on Thu, 21st Sep 2017 11:07 pm 

    IEA is just talk, talk. Free market is not anticipating a big price spike. Futures strips (WTI and Brent) are flat in the 50s. That is people putting real betting money on the line. They might be wrong too. But I will listen more to people who put their money where their mouth is.

  7. makati1 on Fri, 22nd Sep 2017 12:59 am 

    Anon, I would rather listen to those who actually bet and win than just those who put their money where their mouth is. The world is full of fools. Look at the Stock Market Casino.

    I ask the same question of ‘financial advisors’. If they are so good, why aren’t they rich and laying on some sunny beach sipping drinks and watching the view. Never found one yet that could answer that without lying. lol

  8. Davy on Fri, 22nd Sep 2017 6:44 am 

    “flat in the 50s. That is people putting real betting money on the line. They might be wrong too. But I will listen more to people who put their money where their mouth is.”

    I agree but in the case of oil only short term. The possibility of serious demand destruction from economic decline and that combined with serious alternative energy efforts changes the dynamics longer term. IOW, I feel we are in uncharted waters. The economy has never faced a post QE environment. Maybe we will wade through it. We waded through 08. It really is in the end a matter of confidence. If you can prevent destructive human tendencies towards panic and rick off attitudes you can maintain economic activity that is until systematic issues render any effort moot. The alternative energy push has the potential to make a big dent in oil demand. I don’t agree with techno optimist long term on a 100% transition but I see an over 40% transformation doable. That frees up a lot of oil problems. That may or may not make oil prices low or high but it changes the price dynamics. We have never been in a modern alternative energy economy. Shorter term I feel unless we have shocks oil price will be stagnant.

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