Fuel for Thought: Oil outlook - crunch time or gloom mongering?

That the global oil market is set to tighten over the coming years is not in doubt, but whether it's time to hit the panic button over a future supply crunch is another issue.

Industry warnings over the risk of an oil supply "crunch" and a potential return to high-cost oil in the coming decade due to the massive cuts in upstream spending since 2014 have been circulating for some time.

The consensus is that rebounding US shale supplies will keep a lid on oil prices at least in the short term, but there is much less unanimity on whether the oil market will enjoy a soft or painful landing some five years from now.

The International Energy Agency in October said sliding levels of investment in conventional oil fields was putting future flows from the sector on a knife's edge, threatening to create a supply gap of some 16 million b/d by 2025.

OPEC and a number of leading oil market watchers have also sounded caution over an impending return to an oil price bull cycle unless new oil projects are sanctioned quickly and the investment dollars begin to flow.

The underlying logic, they believe, is straightforward. After peaking at almost $700 billion in 2014, global upstream spending collapsed to $433 billion in 2016 following two back-to-back declines of about 25% a year, according to the IEA. As a result, more than 6 million b/d of projects have been postponed or canceled across non-OPEC and OPEC countries.

At the same time, oil demand growth is set to climb by at least 1 million b/d each year while field decline rates are accelerating, raising the requirement to fill an ever bigger hole in future flows from existing fields.

Global dependence on US shale output will grow but, the reasoning goes, even under the most optimistic scenarios, shale will simply be unable to plug the impending supply shortage and OPEC's own spare capacity will wear ominously thin.

By the IEA's reckoning, demand for OPEC crude is expected to jump to 35.8 million b/d by in 2022, up from 32.2 million b/d last year.

The sharp increase means OPEC spare capacity will contract to less than 2% of global demand in 2022, a 14-year low and almost half the levels in 2008 when oil prices hit record highs.

MORE OIL SUPPLY READY TO BE TAPPED

But not everyone follows this line of thinking and many point to a more nuanced picture for global oil supply in spite of the acute spending slump since 2014.

For starters, upstream spending may be on a path to recovery. Final investment decisions on big upstream projects began to return at the end of 2016 and FIDs are expected to double globally this year.

The spending that does return will also stretch further than it did in the years preceding the 2014 price collapse. Soaring industry costs meant, up to then, many oil majors were effectively running to stand still in terms of production growth. In many cases, producers were even failing to achieve that.

With upstream industry costs shrinking at least 30% since the downturn, the impact of the falling capital expenditure is largely mitigated by falling breakevens, many believe.

The potential for further cost cutting and efficiency gains in a $50-$60/b oil price world capped by US shale, has made Citigroup, for one, less pessimistic over a future supply gap, allowing more projects currently on ice to come to market.

Citi argues that the growth potential of deepwater and oil sands, in addition to further technological improvements and cost deflation, could also "neutralize" any supply tightness in the medium term.

Branding the US shale oil revolution "unstoppable" with oil prices above $40/b, Citi believes the US shale recovery will be more robust than most forecasts, potentially adding 3 million to 5 million b/d of new "short-cycle" supply to the market by 2022.

Outside the US, the availability of low-cost oil in Iran, Iraq and Venezuela, and the potential for supply surges from Russia and the return of disrupted oil in Libya and Nigeria will all play a part in offsetting delayed start-ups elsewhere, according to Citi.

One particular bone of contention is the expectation for accelerating field decline and depletion rates in response to the lack of activity on existing conventional fields.

After all, excluding US shale and OPEC producers, global rigs counts have almost halved since 2015.

There may be further good news for market balances on the demand side.

Oil demand growth is being tempered globally by efficiency gains which are cutting energy intensity and driving a further decoupling of economic growth and energy consumption.

Continued moves towards natural gas as the lower-carbon fuel of choice for the coming decades are also seen as weakening the world's dependence on liquid hydrocarbons.

For now at least, it seems the alarm-inducing headlines over the fallout from the recent upstream investment dearth have won the day. It remains to be seen whether producers will rebound from the shock of low prices to prove the naysayers wrong.