The Organization of the Petroleum Exporting Countries (Opec) has lowered its long-term estimates for oil demand but says $10 trillion of investment will still be needed between now and 2040 to cover future needs and prevent a spike in prices.
The forecasts, contained in the group’s World Oil Outlook, echo recent comments by senior officials in Saudi Arabia who have emphasised the dangers of future supply shortages as the oil industry has slashed investment in new projects in the face of sharply lower prices, writes Neil Hume, Commodities Editor.
They emphasise the delicate balancing act facing Opec and its most powerful member as they persist with a strategy that puts long-term exports and market share over short-term financial gain.
“If the right signals are not forthcoming, there is a 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 on prices,” said Abdalla El-Badri, secretary-general of Opec, said in the report.
Oil prices has halved to less than $40 since Opec decided a year ago that it would no longer prop up the oil market, with Saudi Arabia saying it was tired of cutting output to guarantee $100 a barrel for high-cost rivals.
Major oil companies and producer nations have responded to the rout in prices – Brent crude dropped to its lowest level in more than a decade on Monday, surpassing lows reached in the depths of the financial crisis – by slashing hundreds of billions of dollars of investment in new projects.
This has raised concerns that investment will not keep pace with growing oil demand, potentially leading to a supply crunch in the future. The International Energy Agency, the West’s energy watchdog, has also expressed concerns about the impact of investment cuts.
It the report, Opec states $400bn of oil related investments will be needed every year between now and 2040 to cover future demand, which it sees increasing by more than 18m barrels a day to 109.8m b/d by the end of the forecast period.
That figure is 1.3m b/d lower than in last year’s report and reflects improvements in energy efficient and carbon emission policies. But it is higher than a forecast from the IEA which sees oil demand reaching 103.5m b/d.
“It all means that investments remain huge,” said Mr El-Badri in the report, adding:
In the current market environment what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supply. This balance is essential in making sure the necessary future investments are made.
Over the medium term, the report sees demand increasing by 1m b/d, from 92.8m b/d in 2015 to 97.4m b/d by 2020.
The report assumesoil prices will stay below $100 a barrel in the long-term but gradually recover from their current depressed levels as supply growth slows and the market rebalances. OPEC reference basket, which measures the average price of crude produced by its members, is seen rising to $70 a barrel by 2020 and $95 by 2020. That compares with $31.15 for the basket on Tuesday.
The price assumptions, which exclude the impact of inflation, are lower than last year’s World Oil Outlook when they were $95.4 and $101.6 a barrel respectively. On Wednesday morning, Brent was trading at $36.44 a barrel.
On the supply side, production from outside Opec is seen rising from 57.4m b/d this year to 61.5m b/d in 2025 before declining to 59.7m b/d by 2040. That estimate has been reduced by 2.2m b/d since last year’s publication.
Opec crude is seen rising by 10m b/d to a level of 40.7m b/d by 2040 and 9m b/d more than the cartel’s current estimated production of 31.7m b/d .