London — The oil market is well positioned to avoid a supply crunch in the coming years despite a growing disconnect between upstream investment and oil demand growth, the head of the International Energy Agency's oil market division Toril Bosoni told S&P Global Platts in an interview.
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The Paris-based agency in its March oil report played down suggestions of a commodity supercycle and a looming supply deficit in the near term, but Bosoni said it it was even unlikely later this decade thanks to OPEC+ being able to maintain dwindling but still significant oil market shock absorbers.
"Not only do we have relatively healthy inventories, although they have drawn down and continue to be drawn down, but on top of that inventory cushion, we estimate OPEC+ countries are sitting on spare capacity of around 9 million b/d and that is excluding Iran, so that capacity can be brought to market relatively quickly," Bosoni noted in an interview on March 30.
"Looking further ahead, that capacity cushion should go a long way to keeping the market in balance in the medium term," Bosoni added, warning that in the absence of fresh upstream investment, the spare capacity cushion would erode in the coming years.
"But even so by 2026 we see global effective spare capacity excluding Iran is still more than 2 million b/d, so for now we are not seeing a risk of a supply crunch emerging this year or in the coming years," she said.
Spare capacity is often defined as the amount of crude that can be produced within 30 days and sustained for at least 90 days, with Saudi Arabia historically having the greatest spare capacity. Global spare capacity has over the past decade averaged close to 2 million b/d according to S&P Global Platts Analytics calculations.
With upstream oil and gas spending down around 30% in 2020 and showing little sign of recovering in 2021, Bosoni highlighted that the investment level currently is more consistent with the IEA's sustainable development scenario, which assumes that global oil demand already peaked in 2019.
At the same time, Bosoni warned that in the absence of stronger policies to curb oil demand use, the IEA is expecting oil demand to grow every year to 2026. Under the IEA's baseline Stated Policies Scenario, demand also increases out to 2040. The oil watcher pointed to a disconnect between investment trends on the supply side and forecasts for continued demand growth on the other, emphasizing the importance of the spare capacity buffer.
Bosoni said the incident involving a container ship blocking the Suez Canal, which is a key shipping artery for almost 10% of seaborne oil trade, serves as a "good reminder that energy security and oil inventories will remain crucial even in a market that is a relatively adequately supplied." She said that is especially the case as countries undergo the transition to cleaner energy supplies, when spare capacity and oil inventories may play a crucial role in mitigating oil supply disruptions in the years to come.
US, China potential surprises
Bosoni believes the US shale industry will continue to focus on spending discipline, free cash flow generation, deleveraging and cash returns. She sees this dramatic shift from recent years -- when US crude's growth rocketed -- as being instrumental in the supply side squeeze, with the IEA predicting nearly half of the supply growth to 2026 to come from Middle East producers, largely from US shutting production.
It's a view shared by Platts Analytics which sees global oil supply growth in 2021 led almost entirely by OPEC+ as the US faces declines, before Platts Analytics sees US output creeping back up from 10.89 million b/d in 2021 to 11.79 million b/d in 2022.
Bosoni also did not rule out a US shale recovery if oil prices remained above $60/b for a lengthy period of time amid a tighter market.
"As we have seen in the past the US shale industry has been very responsive to prices and market signals, I think under the right conditions we could very well see the industry scaling up activity again and reclaim market share," Bosoni said.
"Sustained oil prices above $60/b could allow oil companies to respect the pledges that they made in their latest investor strategies to maintain capital discipline, return capital to investors, reducing their debt but at the same time increase their investment," she added.
Bosoni said China on the demand side also has the potential to surprise. While the IEA is expecting Chinese oil demand growth to slow markedly in 2021 and to reduce oil intensity, Bosoni said growth could be stronger if Chinese policy is less restrictive than the agency expects.
"If China continued to build strategic stocks it essentially amounts to increased demand and so it will play an important role in the oil market rebalancing," Bosoni said, highlighting how China buying relatively cheaper oil in 2020 to put in their in inventories, both strategic and commercial, helped prop up oil markets.
The IEA sees oil demand returning to pre-crisis levels by 2023, a more downbeat view than Platts Analytics which sees global oil demand touching pre-pandemic levels a year earlier.
The oil market's chief noted the risks from regions such as Africa and Asia are to the downside given Covid-19 uncertainties over the vaccine rollout amid global risks around new strains of the virus. Meanwhile, jet fuel, amounting to around 8% of total pre-pandemic oil demand, could give oil consumption a surprise boost.
"While we see jet fuel demand subdued to 2023-2024, it is possible that pent-up demand and high savings accumulated through the crisis could actually lead to higher travel demand once restrictions are eased and that means air travel demand could recover sooner and see stronger growth than we are expecting currently," Bosoni explained.
Bosoni said that while oil market rebalancing first and foremost depends on the speed of recovery in oil demand, the speed that OPEC+ countries ease the production cuts that are in place will be crucial. Oil prices have rallied since November on the demand recovery story, with Dated Brent rising by more than $20/b before steadying in the $60/b-range.
OPEC and its allies including Russia will decide on whether to roll over production cuts on April 1, with the 23-country pact keeping more than 7 million b/d of crude output off the market and with Saudi Arabia removing an additional 1 million b/d. So far, demand side concerns have meant a cautious approach to easing quotas.
Bosoni noted that the reliance on oil revenues to balance budgets means "there is a strong incentive for those producer countries who are part of OPEC+ to continue with market management to support the oil prices, especially given the uncertainty around oil demand we see this year and into 2022."
Platts Analytics sees balances tightening, stocks continuing to draw and oil prices increasing heading into the middle of 2021 as demand and refinery runs growth outpace supply growth, with oil prices reaching the mid-$70 range around that time.