IEA: Quick new investments needed to avoid sharp oil price spike after 2020

If new investments aren’t approved soon, the global oil supply will lag behind the demand after 2020, Dr. Fatih Birol, the head of the International Energy Agency said on Monday. Birol also said that IEA doesn’t see the oil demand peaking any time soon.

Speaking at the Ceraweek conference in Houston, Birol told the reporters that without newly approved projects, oil prices could rise sharply after 2020.

According to IEA’s report, the global situation will be comfortable for the next three years, however, Birol said there’s is a slow but steady erosion of inventories taking place right now. Thus, without new investments, IEA expects a sharp drop in the supply growth after the „comfortable“ three-year period.

Speaking about the countries that will provide growth over the next few years, Birol said that 60 percent of global growth is expected to come from the U.S., Canada and Brazil. He explained that the U.S. growth was mainly related to the rising oil prices, while the uptick in supply from Canada and Brazil will come from the projects sanctioned before the oil price crash in 2014.

“We are witnessing the start of a second wave of US supply growth, and its size will depend on where prices go,” said Dr Fatih Birol, the IEA’s Executive Director. “But this is no time for complacency. We don’t see a peak in oil demand any time soon. And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.

But, IEA said, the supply growth could stall by 2020 if the record two-year investment slump of 2015 and 2016 is not reversed. While investments in the US shale play are picking up strongly, early indications of global spending for 2017 are not encouraging.

Elsewhere, IEA said that within OPEC, the bulk of new supplies will come from major low-cost Middle Eastern producers, such as Iraq, Iran, and the United Arab Emirates. Others like Nigeria, Algeria and Venezuela will decline. For its part, production from Russia is forecast to remain stable over the next five years.

Shift in demand centers

According to the IEA report revealed on Monday, oil demand will rise in the next five years, passing the 100 mb/d threshold in 2019 and reaching about 104 mb/d by 2022.

In IEA’s outlook, developing countries account for all of the growth and Asia dominates, with about seven out of every 10 extra barrels consumed globally.

Birol also said that there will be a shift in the demand centers, with India’s oil demand growth outpacing China by then. India is currently the world’s third largest consumer of oil and petroleum products.

While electric vehicles are an important factor for oil demand, the IEA estimates they will displace only limited amounts of transportation fuel by 2022.  The IEA also estimates that transport sector will account for a half of the global demand growth, with petrochemicals taking one third of the growth.

Spare production set for decline

“The demand and supply trends point to a tight global oil market, with spare production capacity in 2022 falling to a 14-year low,” IEA said.

The report also highlights changes in international oil-trade flows and investments in storage infrastructure. Also, IEA’s report said that Asia will need to look beyond the Middle East to meet its growing import requirements.

IEA said the massive oil demand growth in Asian markets will mean the Middle East will simply be unable to meet such demand, thus causing more crude oil flowing from the West to East, with exports growth from both Brazil and Canada higher than from the Middle East.

By Bartolomej Tomić, Senior Editor, Offshore Energy Today