Despite the support of OPEC, crude prices remain in the doldrums again this year. While many initially expected that oil would stay in the mid-$50s, it has fallen well short of those forecasts, spending most of the year in the $40s. Driving down prices has been a combination of weaker demand growth and unexpectedly robust production from U.S. shale producers as well as Libya and Nigeria, which are both exempt from OPEC’s output cuts.
That said, the longer oil stays lower, the greater the risk it rockets higher in the future. That’s because weaker pricing continues to cause producers to curb long-term investment. In fact, the industry has deferred or delayed $2 trillion of oil projects due to pricing. It’s a situation that might cause an oil supply shortage as early as 2020, which could send prices higher.
Sounding the alarm
Earlier this year, the International Energy Agency (IEA) put out an update to its five-year oil market forecast. The IEA’s conclusion was that “global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices, unless new projects are approved soon.” It’s not alone in issuing a warning to the industry that it needs to start green-lighting new oil projects. One of the most recent voices of concern came from Mark Richard, who is a senior executive for oil-field services giant Halliburton. He recently told the World Petroleum Congress that “the market is going to catch up… you’ll see some kind of spike in the price of oil. Maybe somewhere around 2020-2021, but it’s got to catch up sooner or later.”
Two factors are fueling this concern. First, global oil demand continues to expand. In fact, after a weak first quarter where it only grew by 1 million barrels per day (MMbpd), the IEA noted that demand growth accelerated to 1.5 MMbpd in the second quarter. That led the agency to boost its full-year demand forecast by 100,000 bpd to 1.4 MMbpd, with expectations that the market will expand by another 1.4 MMbpd next year and reach an average of 99.4 MMbpd. Overall, the IEA doesn’t expect oil demand to stop expanding until 2040, though growth in the future should come at a slower pace. (by Matthew DiLallo, The Motley Fool)