OPEC: $95 Oil, But Not Until 2040
In
its latest world outlook, OPEC sketches a rather bearish view for price
recovery, saying that oil might go up to $95 per barrel, but not until
2040
Mon, Dec 28, 2015, 0:48AM EST - US Markets open in 8 hrs and 42 mins
OPEC: $95 Oil, But Not Until 2040
By Andy Tully
December 26, 2015 7:00 PM
This week opened with
the average global price of oil at an 11-year low, yet OPEC expects its
own producers eventually will cut back on production, causing prices to
rebound to $70 per barrel by 2020.
That may seem a long time for producers to wait for oil to become more profitable, but in OPEC’s annual World Oil Outlook,
issued Wednesday, the oil cartel does not see oil prices returning to
the heights of $110 per barrel, where it was before the price crisis
began in June 2014. Instead, it says it doesn’t expect prices to reach
even $95 per barrel until 2040.
The
group’s own reference list of crudes, known as the OPEC Reference
Basket, was as low as $30.74 per barrel on Monday, while the world
benchmark Brent crude was a bit higher at $36.35 per barrel, its lowest
in more than 11 years.
But
the report stressed that “a gradual improvement in market conditions as
growing demand and slower than previously expected non-OPEC supply
growth eliminate the existing oversupply and lead to a more balanced
market.”
The
prices began to fall because of a glut in the market caused largely by
new production in North America, where U.S. drillers relied on hydraulic
fracturing to get oil from shale and Canadians had to extract oil from
its western tar sands. Both are expensive, though, and production in the
continent has slowed as profits narrowed.
Iran
appears ready to take up this slack once a lifting of Western sanctions
over its nuclear program frees it to resume production, probably in
early 2016. Even so, at its Dec. 4 ministerial meeting in Vienna, OPEC
refused to cut production and even dropped its output ceiling of 30
million barrels per day. Indeed, in November, even before the meeting,
the cartel produced 31.7 million barrels per day.
Related: Saudi Arabia Continues to Ramp Up Oil Output in Face of Market Glut
Still,
the Outlook expects OPEC to reduce production, at least briefly, by the
end of the current decade, a move likely to bolster oil’s price. Here
is its current scenario: “OPEC crude supply rises from 30 mb/d [million
barrels per day] in 2014, up to 31 mb/d in 2015. It then falls gradually
to 30.6 mb/d in 2019, before rising slightly to 30.7 mb/d by 2020.”
It
also sees the current trend of lower spending and therefore lower
production by non-OPEC producers eventually cutting into the supply of
oil, increasing demand and thereby raising prices. One chart in the
report shows an expectation that non-OPEC production will rise from 57.4
million barrels per day in 2015 to 61.5 million barrels per day in 10
years, then decline to 59.7 million barrels per day by 2040.
But
all this depends on capital spending by oil companies. If it doesn’t
increase, OPEC Secretary-General Abdallah el-Badri wrote in the report’s
foreword, “there is the possibility that the market could find that
there is not enough new capacity and infrastructure in place to meet
future rising demand levels, and this would obviously have a knock-on
impact for prices.”
While
OPEC expects the demand in many Western countries is likely to decline
between now and 2040 due to “energy efficiency improvements and climate
change mitigation policies. … However, oil demand in developing
countries is expected to increase significantly (by almost 26 mb/d) to
reach 66.1 mb/d at the end of the forecast period. Finally, demand in
Eurasia is estimated at 5.8 mb/d in 2040.”
The
key, then, is for oil companies to maintain balanced investments in
exploration, infrastructure and production, according to el-Badri. “In
the current market environment, what this underlines is the delicate
balance between prices, the cost of the marginal barrel and future
supplies,” he wrote. “This balance is essential in making sure the
necessary future investments are made.”
By Andy Tully of Oilprice.com
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