Global oil markets are going through a period of extraordinary change, according to the International Energy Agency’s annual oil market forecast, Oil 2019.
The US will drive global oil supply growth over the next 5 years thanks to the remarkable strength of its shale industry. Meanwhile, production of heavier crude grades is hamstrung by sanctions and other restraints in key producing countries. All this contributes to a transformation of global oil supplies, with critical implications for energy security and market balances throughout IEA’s forecast period to 2024.
Meantime, IEA continues to see no peak in oil demand, thanks to strong growth of petrochemicals and jet fuel in the US and Asia.
US oil supply
The US continues to dominate supply growth in the medium term. This is happening because US shale is able to respond to price signals more swiftly than other sources of supply—in fact even more US supply could be on the way if prices rise beyond current levels.
IEA forecasts that the US accounts for 70% of the total increase in global capacity to 2024, adding a total of 4 million b/d. This follows spectacular growth of 2.2 million b/d in 2018.
“The second wave of the US shale revolution is coming,” said Fatih Birol, IEA executive director. “It will see [the] US account for 70% of the rise in global oil production and some 75% of the expansion in LNG trade over the next 5 years. This will shake up international oil and gas trade flows, with profound implications for the geopolitics of energy.”
The ability of the US to turn itself into a major exporter in less than a decade is unprecedented, IEA said. By 2024, US oil exports will overtake Russia and close in on Saudi Arabia. This brings greater diversity of supply to markets.
“Greater US exports to global markets strengthen oil security around the world. Buyers of crude oil, particularly in Asia, where demand is growing fastest, have a wider choice of suppliers. This gives them more operational and trading flexibility, reducing their reliance on traditional, long-term supply contracts,” IEA said.
Other non-OPEC
Significant growth also will be seen among other nonmember producers of the Organization of the Petroleum Exporting Countries, including Brazil, Canada, a resurgent Norway, and newcomer Guyana, which together add another 2.6 million b/d in the next 5 years. In total, non-OPEC production is set to increase by 6.1 million b/d through to 2024.
The Oil 2019 report also forecasts that the second-largest increase in crude exports comes from Brazil, which ships an extra 800,000 b/d of oil by 2024. Following Brazil, Norway is enjoying a renaissance and will overtake Kazakhstan and Kuwait in the next 5 years a remarkable achievement.
OPEC production, upstream investment
Among OPEC countries, only Iraq and the UAE have significant plans to increase capacity. These gains have to offset steep losses from Iran and Venezuela, which are subject to sanctions and political or economic turmoil. As a result, OPEC’s effective production capacity falls by 400,000 b/d by 2024.
Iraq reinforces its position as one of the world’s top producers. As the world’s third-largest source of new supply, it also drives growth within OPEC to 2024. The increase will have to compensate for steep losses from Iran and Venezuela, as well as a still-fragile situation in Libya.
The implications of these developments on energy security are significant and could have lasting consequences.
IEA forecasts that 2019 upstream investment is set to rise for the third straight year, according to preliminary plans announced by key oil and gas companies.
For the first time since the downturn in 2015, investment in conventional assets could increase faster than for the shale industry.
“While US production growth has exceeded expectations, we cannot be complacent about investment levels towards the end of our forecast period and beyond,” IEA said.
Oil demand
While global oil demand growth is set to ease, in particular as China’s demand slows, it still increases an annual average of 1.2 million b/d to 2024, according to the Oil 2019 report.
Still, IEA continues to see no peak in oil demand, as petrochemicals and jet fuel remain the key drivers of growth, particularly in the US and Asia, more than offsetting a slowdown in gasoline due to efficiency gains and electric cars.
“Despite efforts to curb plastics use and encourage recycling, demand for plastics and petrochemicals is growing strongly. Led by the US and China, we have identified more than 50 major projects due to come onstream through 2024. These are expected to add 2.2 million b/d in oil consumption over the forecast period, accounting for 30% of global growth,” IEA said.
In recent years, the air travel industry also has witnessed a spectacular expansion thanks to rising passenger numbers. Demand will continue to grow strongly, supported by rising incomes in developing countries, more airports being built, and growing airline fleets. Asia accounts for 75% of this increase over our forecast period. In absolute terms, while China sees the largest jump in demand, India posts the fastest rate of growth, at an impressive 8.2%/year.
Downstream
Downstream, product markets are on the eve of one of the biggest shakeups ever, with the implementation of the International Maritime Organisation’s new rules governing bunker fuel quality in 2020.
Although the shipping and refining industries have had several years notice, there have been fears of shortfalls when the rules come into effect. IEA’s updated analysis, however, shows that industry players are in a strong position to comply in the medium term.
As for the first year, the situation will be tight. Prices for gas oil could rise as demand from the marine sector increases. The industry is adjusting, with the largest incremental volumes coming from the US, the Middle East, and China.
Meanwhile, the refining industry is facing a wave of new capacity additions in the period to 2024, with a net growth of about 9 million b/d. China will overtake US to become the global leader in installed capacity.
Given that these new additions far exceed the increase in demand for refined products, plant closures might be necessary to rebalance the market, though questions remain as to where and when that will happen.
While the global average crude oil barrel produced remains predominantly a medium-gravity sour grade, the availability of heavier crude from several countries is in doubt due to production cutbacks and geopolitical challenges.
At the same time, the average global product barrel is getting lighter as fuel oil demand falls and petrochemicals grow in importance. As a result, the US will be in prime position as a supplier of light types of crude oil that are in growing demand. Shale oil also will help meet the new IMO requirements and provide the quantities of naphtha required for the petrochemicals industry, IEA said.