By Irina Slav
The world is heading towards an oil deficit, if we are to believe recent headlines quoting the chief executive of Saudi Aramco, Amin Nasser. There is simply not enough investment in new production to replace depleted fields, the message ran. Shale oil production growth will not be enough because the shortage, according to unspecified studies, will come in at 20 million barrels a day over the next five years.
Talk of a shortage is not new. Last November, the International Energy Agency (IEA) warned that a shortage could set in as soon as 2020, as the investment shrinkage brought on by the 2014 oil price crash bears fruit. Prices, the IEA had said at the time, could jump significantly at the end of the decade.
The authority reiterated its expectations more recently as well in its World Energy Investment 2017 report, although the concern was toned down, with the IEA saying that a supply crunch may occur “at some point down the line”.
Nasser says that about US$1 trillion in investments were cancelled during the oil price crash. The IEA says that the rate of new oil discoveries is at its lowest level in more than 70 years, and that the only place that will this year register an increase in investments is the U.S. shale patch. Overall, global spending on oil and gas will rise by a moderate 3 percent this year, compared to the 44-percent drop between 2014 and 2016.
These figures paint a rather gloomy picture for bears, while offering a ray of hope for the more patient bulls. However, not everyone agrees the situation is that bad. Citigroup’s global head of commodities, Ed Morse, for instance, was quick to dismiss the worry.
Although Morse acknowledged a deficit, he said his team had estimated this to be about half of what Nasser believes it to be. At 10 million bpd for the five-year period to 2022, the shortage would not be so difficult to deal with, Morse said, as quoted by the Houston Chronicle. Rising production in the U.S., Brazil, and Canada should be sufficient to take care of rising demand by 2019, the Citi analyst said.
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Morse also recalled Nasser stating earlier that the shortage will come in at 30 million barrels daily, which he called a wild overestimate. Yet a tendency to exaggerate the possibility of a shortage is as characteristic of Saudi oil officials, as is their downplaying of U.S. shale in hopes of pushing prices in a more favorable direction.
On the whole, it seems there is consensus about an oil shortage over the medium term. It may only remain a potential shortage, however, if U.S., Canadian, and Brazilian production continues to grow. Also, these are not the only countries on the growth path. Russia and Iran also have expansion plans, likely to be restarted as soon as the OPEC-non-OPEC production cut agreement expires next year. Other OPEC members, notably Libya, Nigeria, and Iraq, are also eager to boost their output.
Nobody seems to be really sure what will happen after March 2018, the deadline for the extended production cut. In fact, nobody seems to be really sure what will happen by the end of this year. Yet banks are revising down their 2018 oil price estimates again, suggesting it would take a shock to see a price recovery.
This will make the recovery in investments difficult, and a shortage more likely. However likely it is, though, the chances that it will upend the oil market are quite slim.
By Irina Slav for Oilprice.com