The influential International Energy Agency sees oil markets rebalancing in 2017 thanks to falling US production but the decline will prove short-lived as efficiency gains will push U.S. output to new records by the beginning of the next decade.
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices when the market, having balanced, then starts to draw down those stocks,” the IEA said in its medium-term outlook.
“Today’s oil market conditions do not suggest that prices can recover sharply in the immediate future,” it added.
Over the course of 2015 to 2021, US output is expected to reach a record high of 14.2 million barrels per day (bpd), after dipping initially this year and next, the IEA said in its report.
Production of US shale oil is expected to drop by 600,000 bpd this year, and a further 200,000 bpd next year before gradually recovering.
“Anybody who believes that we have seen the last of rising production in the United States should think again; by the end of our forecast in 2021, total US liquids production will have increased by a net 1.3 million bpd compared to 2015,” the IEA said.
Overall, global oil supply is expected to rise by 4.1 million bpd between 2015 and 2021, compared with growth of 11 million bpd between 2009 and 2015, the IEA said.
The report forecast OPEC crude oil production capacity would rise by 800,000 bpd by 2021 as lower oil prices force the re-consideration of development projects in the early period of the forecast.
“Iran, now free of nuclear sanctions, emerges as the biggest source of growth within OPEC over the six-year forecast period. The higher capacity will not, however, allow Iran to reclaim its rank as OPEC’s second-biggest crude oil producer after Saudi Arabia. That position is maintained by Iraq through 2021 despite a marked slowdown in its capacity building,” the IEA said.
The supply glut limits any chance of prices rebounding in the short term. The surplus will take longer to clear than previously estimated, according to the IEA.
While U.S. shale oil production will retreat this year and next as the price slump hits drilling, its subsequent recovery will ensure America remains the biggest source of new supply to 2021. The Organization of Petroleum Exporting Countries will expand its market share slightly this decade, with Iran, newly released from international sanctions, displacing Iraq as the organization’s biggest contributor to supply growth.
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices,” the Paris-based adviser to 29 countries said in its medium-term report Monday. “It is hard to see oil prices recovering significantly in the short term from the low levels prevailing” currently, it said.
The report notes that while oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies – at least in the near term. However, the report points to the risk of an oil price spike in the later part of the outlook period arising from insufficient investment.
“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future,” said IEA Executive Director Fatih Birol,
The IEA’s new outlook is the latest sign that oil forecasters are bracing for a “lower-for-longer” price environment.
The agency acknowledged that the industry’s expectations — and its own predictions — that oil markets would recover in 2015 proved “very wide of the mark.”
The report also signals that while OPEC will succeed in its policy of defending market share, the group will have to endure a prolonged period of reduced revenues.
Brent crude traded near $34 a barrel today, having slumped to a 12-year low near $27 in late January.