(EnergyAsia, March 9 2015, Monday) — Forget about oil prices overshooting to the upside and making a strong recovery even as the growth in global oil supply slows sharply from mid-year, predicts the IEA.

With the drastically changed market conditions, the agency said it expects the crude oil price to average US$55 per barrel for 2015 and to gradually rise to US$73 in 2020.

In its medium-term market report to 2020, it said the 50% plunge in oil prices since last June will not be sufficient to derail supply growth which will continue to outpace the projected demand increase.

“These prices suggest that participants expect the market to recover somewhat as it rebalances following cuts in upstream investment,” it said.

Despite the recent improvement in fundamentals, “the market does not seem to be expecting prices to revisit earlier highs any time soon. Not only have prompt prices collapsed, even price expectations for the back end of the curve have been significantly downgraded.”

The report affirmed the continuing role of North America and Iraq, the world’s two leading sources of recent capacity growth, in maintaining the global oil glut through the end of the decade.

The recent price correction will merely cause the North American supply “party” to pause, not bring it to an end.

“By the beginning of the next decade, the region’s non-conventional production will account for an even larger share of the supply mix than earlier forecast,” said the Paris-based agency which represents 29 major energy consuming nations.

In the medium term, the IEA said the real issue of the price collapse is how the accompanying supply-demand rebalancing and price recovery might be different from those that followed similar price drops in the past.

It noted that sharp corrections have rocked the market roughly every decade since the price shocks of the 1970s: in 1986, in 1998, and again in 2008.

The IEA said several major trends contributed to the price collapse: the successful mass application of fracking technology in the US to access tight oil reserves, a slowdown in demand growth in China and other emerging economies, and the growing role of natural gas and renewable energy sources in meeting global energy needs.


North America and Iraq to continue lead production growth

Despite projecting prolonged oil price weakness, the IEA said it expects global production capacity to grow by more than 5.3% from 98 million b/d in 2014 to 103.2 million b/d by the end of the decade. Two thirds of this growth will come from non-OPEC producers.

Led by North America, non-OPEC supply will reach 60 million b/d by 2020, with growth projected at an average annual 570,000 b/d, down from the average annual rate of one million b/d in 2008-13.

Last year’s non-OPEC supply surged by a record 1.9 million b/d.

It expects North America’s non-conventional production to account for an even larger share of the supply mix than earlier forecast at the start the next decade.

Despite slowing production growth, the region will surge ahead with forecast gains of three million b/d by 2020.

The IEA expects North America’s production increase to continue to offset declines in other non-OPEC jurisdictions — none more so than Russia, now projected to swing into contraction of more than 500,000 b/d by 2020, down from an earlier projection of small growth.

Despite OPEC’s stated policy of defending market share, the IEA expects the cartel to boost its combined crude production capacity by 1.2 million b/d for an average annual increase of 200,000 b/d. Almost all of this gain will be provided by Iraq.

Notwithstanding the threats of the Islamic State (ISIS) insurgency, Iraq succeeded in raising production to a 35-year high of 3.7 million   b/d last December.



Demand growth slowdown

Meanwhile, China, a leading engine for global oil demand growth, and other emerging economies have entered a new, less oil-intensive stage of development.

The IEA expects the combined annual oil demand of the emerging economies to grow by 1.19 million b/d through 2020, far less than in the past.

“The global economy, reshaped by the information technology revolution, has generally become less fuel intensive,” it said.

“China’s reorientation away from heavy manufacturing and exports towards a more consumer-driven economy puts a crimp on what had been the leading engine of global oil demand growth for the last 15 years.”

Concerns over climate change are recasting energy policies as have the globalisation of the natural gas market and declining cost and availability of renewable energy.

After years of sustained record-high prices, oil has been floored by a severe “inevitable correction,” said the IEA.

Changed trading conditions will contribute to the market’s subdued outlook as “non-OPEC supply has become far more price elastic than in the past, while demand has at the same time become significantly more price inelastic on the downside.”

“The result is that the market rebalancing will likely occur relatively swiftly but will be comparatively limited in scope, with prices stabilising at levels higher than recent lows but substantially below the highs of the last three years,” it said.


Lower oil prices could reduce geopolitical risks

The IEA countered the conventional view that low oil prices could heighten geopolitical risks in hydrocarbon-rich countries that are dependent on resource revenues to maintain high level of social spending to placate their restive populations.

The agency states that in some cases lower prices can offer upside risk to supply.

“For producer countries, lower export and fiscal revenues provide an incentive to maximise output and stimulate production growth, in a bid to make up in volume for per-barrel losses,” it said.

“Down cycles typically lead producer countries to tone down resource-nationalistic policies and thus can in some ways at least ease above-ground hurdles to supply,” it said.

“Iran also may be in a position to increase production and exports rapidly if it reached agreement over its nuclear programme with the West.”