This time around it is not ‘business as usual’

The recent fall in oil prices will cause the oil market to rebalance in ways that challenge traditional thinking about the responsiveness of supply and demand, according to the International Energy Agency’s (IEA) Medium-term oil market report (MTOMR), which was released during coffee break on day one of IP Week 2015.

The US light, tight oil (LTO) revolution has made non-OPEC production more responsive to price savings than during previous market sell-offs, states the report, adding that this would likely set the stage for a relatively swift recovery. However, at the same time, lower oil prices will not provide as strong a boon to oil demand growth as might be expected.

As producers cut their spending, supply will grow far more slowly than previously projected, but global capacity is still forecast to grow by 5.2mn b/d by 2020 and the toll on production will vary country by country. Growth in US LTO is expected to regain momentum in the latter part of the forecast period as prices recover, and North America remains a top source of supply growth for the remainder of the decade. In contrast, Russia faces a ‘perfect storm’ of lower prices, sanctions and currency swings, pushing its production into contraction. OPEC’s share of global supply will inch up from recent lows but will not recover to the levels enjoyed before the surge in LTO supply, says the report.

‘The unusual response to lower prices is just one more example of how shale oil has changed the market’, commented Maria van der Hoeven, IEA Executive Director. ‘OPEC’s move to let the market rebalance itself is a reflection of that fact. It may have effectively turned LTO into the new swing producer, but it will not drive it out of the market. LTO might in fact come out stronger.’

Assuming that international sanctions on Iran remain in place, the IEA expects OPEC growth in crude production capacity to be limited to 200,000 b/d per year. The overwhelming majority of that growth will come from Iraq and thus will be at significant risk as geopolitical instability there persists.

A combination of cyclical and structural factors are expected to keep the demand response to lower prices relatively subdued, and demand in several key oil exporters will be hurt by the revenue loss. Nevertheless, global demand is now expected to grow slightly faster than supply capacity, causing the market to gradually tighten and the ‘call on OPEC and stocks change’ to rise from 2016 onwards.