It may be counterintuitive to say that the fall in oil demand and the resulting glut in 2020 could lead to an oil supply crisis in just a few years.
Still, a growing number of experts and international agencies are warning that the world could be heading for an oil shortage when demand for oil finally recovers from the crisis inflicted by COVID at the end of 2022 or 2023.
Last year, the pandemic reduced global demand for oil, which is not expected to return to pre-crisis levels for at least a year and a half. But the coronavirus has also accelerated a structural decline in upstream oil investments like all E&P companies. The big oil powers, U.S. shale producers and national oil companies have cut back on capital spending in the wake of falling prices.
Investments in new oil supply have now fallen to a low level in more than a decade. If the industry does not increase upstream investment in the coming years, the oil market could be heading for a supply crunch after global oil demand picks up, analysts and forecasters warn.
Upstream investment at the lowest for several years
Investments in new oil supply have never been able to reach the peaks seen in 2014, just before the previous oil crisis of 2015-2016 prompted the oil industry to reassess its spending on major projects.
But 2020 investments have hit a new low.
The International Energy Agency (IEA) expected global investment in upstream oil and gas collapses 32% year-over-year to reach US $ 328 billion in 2020, after three consecutive years of investment growth. The expected rate of decline in investments in 2020 was greater than the 25-26% decline in the period 2015-2016, while the value of investments in 2020 was down about 60% from the peak of 779 billion US dollars in 2014. The decline in investment in 2020 already moves around 2.1 million barrels per day (b / d) away from the oil supply forecast in 2025, the IEA said. The IEA also warned that if investments were to stay at 2020 levels over the next five years, it would reduce the level of oil supply forecast in 2025 by nearly 9 million bpd.
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Global upstream investment will remain low this year, just as it was in 2020, Wood Mackenzie said last month, forecasting upstream oil and gas investment at a 15-year low of just US $ 300 billion, down 30% from the level of pre-crisis investment in 2019. “The world may be sleepwalking in a tight supply, albeit beyond 2021,” said Simon Flowers, president and chief analyst at WoodMac.
Oil deficit in 2021
This year, especially in the second half of the year, could see monthly oil supply shortfalls at their highest level in years, according to a analysis by Rystad Energy. According to the consulting firm, the current lockdowns were expected to create a surplus of 500,000 b / d in February, 1.4 million b / d in March and a small surplus in April, after which the market is expected to recover.
This forecast was released before Saudi Arabia surprised the market last week by saying it would cut a further 1million bpd beyond its OPEC + quota in the next two months, as demand is expected to be at its lowest this year with lockdowns across Europe and a slow start to vaccine deployment.
Deeper deficits later this year could keep oil prices high enough to justify US oil production above the currently expected level of around 11 million bpd.
“As we have already warned our customers, shale is a monster that can slow down, but cannot kill,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy last month.
Oil supply amid peak demand
The American shale is a quick return investment. But if the world is to avoid a tight supply, additional investment will be needed in conventional oil projects which, unlike shale, can pump oil for decades.
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Analysts believe that a lasting shift in oil consumption after the pandemic and the energy transition will accelerate the peak oil demand schedule – the day after which global oil demand stops growing.
Even though we have already reached peak demand for oil – which most analysts now point to around 2030 or a little earlier – the world will continue to need oil.
“Peak oil demand does not mean the end of oil. Oil will be there for a very, very long time, ”Bernard Looney, BP CEO said last October, even as the company he heads pledged to cut oil production within a decade.
With many maturing oil fields around the world, a new supply will be needed just to maintain the current production rate. Some of this supply could come from American shale, if oil prices allow, but another part should come from conventional oil exploitation.
If the capex tightening upstream of 2020 persists for a few more years, the oil market could plunge into a supply crisis and price spikes in the mid-2020s.
By Tsvetana Paraskova for OilUSD
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