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The medium term oil market

Hydrocarbon Engineering,

In its annual Medium Term Oil Market Report (MTOMR), the IEA has said that the recent crash in oil prices will cause the oil market to rebalance in ways that challenge traditional thinking about the responsiveness of supply and demand.

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

An unusual response

As producers cut spending, supply will grow far more slowly than previously projected, but global capacity is still forecast to expand by 5.2 million bpd by 2020, and the toll on production will vary by country. Growth in US LTO is expected to regain momentum in the latter part of the IEA’s 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.

Maria van der Hoeven, IEA Executive Director commented, “this unusual response to lower prices is just one more example of how sale oil has changed the market. 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.”

OPEC and politics

Assuming that international sanctions on Iran remain in place, OPEC growth in crude production capacity is expected to be limited to 200 000 bpd /y. The overwhelming majority of that growth will come from Iraq and will thus be at significant risk as geopolitical instability there persists. A combination of cyclical and structural factors will 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.

Political risk to supply will remain extraordinarily elevated in the next few years, both on the upside and the downside. Lower oil prices may heighten the risk of political disturbances in oil export dependent economies countries with low buffers, but can also offer an incentive to maximise output and stimulate production growth.

Edited from press release by Claira Lloyd

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