The IEA’s latest medium-term oil and gas outlook takes the measured tone typical of the OECD agency. ‘Plus ça change…’ it muses about the differences between this year’s five-year forecast, compared to a year earlier. Concerns about investment in building future capacity are somewhat abated, it says, as are worries about refining. But those worries are not completely assuaged.
So, here’s what you’re waiting for: oil supply and demand.
The ‘global balance summary’ on its base case scenario (in terms of economic growth) is on the right – click through for bigger view.
Interestingly, decline rates from non-Opec oil fields have been revised downwards, from 5.8 per cent last year to 5.1 per cent this year:
The net decline proxy for non-OPEC baseline oil supply now stands at closer to 5.1% annually than the near 5.8% which we derived last year, after monitoring decline at mature fields over the course of 2008/2009.
Of course, field-specific data are patchy, and our projections for total non-OPEC supply in 2015 would swing sharply subject to a relatively narrow variation in assumed decline rates. In addition, even with more benign decline rate assumptions this year, the global capacity base still loses around 3.1 mb/d each year to mature field decline. The investment challenge to offset this and meet global demand growth remains formidable.
New projects, the IEA says, also helped non-Opec supply fared better than expected last year, leading to a supply capacity like this:
And as for Opec supply?
From this chart, you can see that the IEA reckons Opec spare capacity will be a reasonable cushion for the next five years:
But the IEA doesn’t think this level of spare capacity will be enough to reassure markets:
A broad-based rise in expected OPEC capacity in 2014 pushes spare capacity back above 4 mb/d again, before it dips toward 3.5 mb/d in 2015. That level remains much more comfortable than prevailed for much of 2002 – 2008, noting also that spare capacity alone does not determine market sentiment. But the declining trend itself, to levels below 5% of global demand, suggests more jittery markets ahead, after a prolonged spell of relative price stability last year.
This echoes a theme in energy policy circles that is becoming fairly established now, which is this: oil prices are not determined by fundamentals OR financial markets (ie, speculators); but they are driven by all market participants trying to guess, based on limited data, what the medium to long-term supply and demand balance will be.
(As a side note, the IEA estimates ‘effective Opec spare capacity’ by simply removing 1m b/d from ‘implied Opec capacity’ – this, it says, is what history has shown to be the case.)