Assuming a 4.5% rate in global economic growth to 2015, world oil demand is expected to grow about 1.1 MMBD annually to reach 93.4 MMBD in 2015, up 6.0 MMBD from 2010E demand. Risks to the demand outlook include the continuing risk of sovereign debt defaults in Europe, sluggish growth and high unemployment in the US, and overheating of the Chinese economy followed by a hard landing.
While the IEA expects non-OPEC conventional oil production to plateau to 2015 (up only 0.3 MMBD from 2010E), growth in biofuels (up 0.8 MMBD), higher cost Canadian oil sands (up 1.0 MMBD), and OPEC NGLs (up 1.8 MMBD) will add incremental supply. The deficit (2.1 MMBD) will be made up by increased dependence on OPEC crude oil production.
Current surplus global oil inventories should decline from 2H11 with sustained growth in oil demand, putting upward pressure on prices. OPEC’s current effective spare capacity is 5.3 MMBD after adjusting for production constraints on Nigeria and Venezuela. While its crude capacity is expected to increase 1.4 MMBD by 2015, the call on OPEC crude is expected to increase more to 36.9 MMBD in 2015, reducing its effective spare capacity to 3.6 MMBD, or 3.8% of world oil demand without any geopolitical disturbances.
International sanctions on Iran appear to be having a meaningful effect which could further tighten oil markets. Its estimated gasoline consumption in September declined 18%, probably the result of curtailed gasoline imports, and it once again postponed removal of consumer subsidies on oil products. Social upheaval could put Iran in turmoil. Iran’s current oil production of 3.9 MMBD is expected to decline to 3.1 MMBD in 2015 regardless as reinforced sanctions delay new projects and accelerate field decline for lack of needed technology and equipment. The current outlook in Nigeria is worrisome as well.
While the US oil service market is expected to move sideways in 2011, the industry believes it is in the early stage of a multi year up-cycle, with growth shifting to markets outside North America. The outlook for the oil service industry is positive.
Superior performance from energy stocks is linked to the oil price outlook.
Crude oil prices currently approximate $88/B, near the early May high. Oil prices for the year will average over $79/B, up 28% from $61.83/B in 2009. Since October, oil prices have been driven higher by bullish sentiment supporting commodities in general and stronger than expected global oil demand in 3Q10. Oil price strength could be sustained seasonally in coming weeks based on forecasts of continued cold temperatures in the US and Europe. Futures contracts however, have moved into backwardation from mid 2011 where crude prices are below current spot prices as producers appear to be taking advantage of oil prices above $90/B to hedge future production. The prevailing futures strip remains within a $75-$85/B range to 2015. At its recently concluded meeting, OPEC’s Secretary General expressed satisfaction that oil prices are at a comfortable level for both producers and consumers. He indicated if oil prices went to $100/B, OPEC would have to act. The Saudis also indicated they are comfortable with oil prices in the $70-90/B range. October oil inventories increased to 60.1 days forward demand cover, from 59.7 in September, and remain near the 60.9 day peak in August; whereas something near 54 days is normal. Year to date, the XLE energy SPDR and the OIH oil service index are both up 12%, while the S&P 500 is up 10%. The lagging XNG natural gas index is up 5%.
In its latest report, the IEA increased its estimate of world oil demand for 2010 again to 87.4 MMBD (up 2.8% Y/Y or +2.5 MMBD) largely on stronger growth in product demand in the US and China. (The strongest prior annual increase in world oil demand was 3.0 MMBD in 2004 and the prior peak in world oil demand was 86.4 MMBD in 2007.) In the US, growth has been remarkably strong the last 2 quarters, with diesel demand growing 10.5% Y/Y. (Diesel demand growth appears to have slowed significantly in recent weeks however.) US gasoline demand has also been remarkably resilient this year, with demand during the summer driving season up 1.2% Y/Y. It is now expected to be relatively flat in 2011. Apparent oil demand in China rose 12.6% Y/Y in October and concerns have increased that the Chinese economy is in danger of overheating. GDP growth about 10% is expected this year and inflation is creeping up toward 5%. Two recent interest rate increases, the first in nearly 3 years, are aimed at cooling red hot real estate prices and inflationary expectations. Japan also had an unprecedented summer heat wave, which raised oil demand.
The IEA’s estimate of world oil demand in 2011 is also increased, up 1.3 MMBD Y/Y to 88.8 MMBD, and broadly in line with historic trends relative to expected global GDP growth. Nevertheless, oil product demand in the OECD is expected to resume its structural decline in 2011 (2010E 45.9 MMBD, 2011E 45.7 MMBD).
Assuming global GDP growth about 4.5% per year, the IEA then expects world oil demand growth to increase about 1.1 MMBD annually to reach 93.4 MMBD in 2015, which is 1.5 MMBD higher than its June forecast but generally in line with other forecasts. All of the growth in oil demand will remain in developing economies. China is the key driving force, assuming it is successful at engineering a soft rather than a hard economic slowdown. Last year, 20 mil new cars were sold in China, adding 350 MBD to oil demand. Risks to the demand outlook include the continuing risk of sovereign debt defaults in Europe, sluggish growth and high unemployment in the US, and overheating of the Chinese economy followed by a hard landing.
In Iran, estimated gasoline demand in September fell 18%, possibly due to supply problems related to international sanctions on gasoline imports. Its government once again postponed the removal of oil product subsidies previously legislated. Iran has a population of 73 million and, with inflation probably surging, social unrest could weaken the government.
Estimated non-OPEC oil supply in 2010 is increased to 52.8 MMBD, and is now up 1.1 MMBD Y/Y on higher output in Canada, Kazakhstan, and Brazil. This represents its best performance since 2004. Nevertheless, non-OPEC supply for 2011 remains unchanged at 53.4 MMBD in 2011, (+600 MBD Y/Y), with added supply from the US (liquids rich shale plays), Mexico (reflecting Pemex success in stabilizing production from mature oil fields), and biofuels. This will be the strongest 3 year run in increased non-OPEC production since 2002-2004 when recovery in Russia was the driving force.
Non-OPEC supply is forecast to continue to grow minimally thereafter to 54.0 MMBD in 2015. For the period 2009-2015, overall non-OPEC supply is expected to grow by 2.3 MMBD, with the bulk of the increase coming from biofuels (+800 MBD to reach 2.4 MMBD in 2015 from 1.6 MMBD in 2009), oil sands (+1.1 MMBD), and NGLs. Conventional crude production is expected to increase by only 255 MBD, with strongest increases largely from Brazil (+480 MBD), Colombia (+210 MBD), the Caspian (Kashagan Field), and Russia. Conventional crude declines are strongest in the UK, Norway, and Mexico. Deepwater supply rises from 6% of total supply to 8%, and from 22% of offshore production to 28%.
A brighter outlook for US unconventional onshore production more than offsets the impact of drilling delays in the Gulf of Mexico. Total US crude and liquids supply is expected to be flat 2009-2015 around 7.45 MMBD. No permits for deepwater drilling in the Gulf of Mexico have been granted since the moratorium was lifted and permits for shallow water drilling, not covered by the moratorium, have been very slow in coming. With tighter regulations and protracted delays, decline rates at post-peak Gulf of Mexico oil fields will steepen. The impact is expected to reduce Gulf of Mexico production in 2015 by 300 MBD to 1585 MBD, then representing 21% of total US production.
The IEA anticipates a plateau in Russian oil production from 4Q10 as the impact of new green-field startups is spent and declines in base production become more prominent. Russian oil production is 10.5 MMBD, or 20% on total non-OPEC supply. Russia itself expects plateau production for the next decade, with downside risk to 7.9 MMBD without changes to its tax regime. China’s oil production (4.1 MMBD, 8% of non-OPEC) is also expected to peak in 1Q11 and decline thereafter as new offshore fields reach peak capacity.
The Kashagan oil field in the Caspian Sea offshore Kazakhstan is scheduled to begin production by the end of 2013. Its original start date was in 2005. Phase 1 production of only 375 MBD is scheduled to ramp up to 1.5 MMBD about 2018-2019. Kashagan has proven reserves of 7-9 bn B and is the largest oil discovery in over 30 years. Kazakhstan currently produces 1.6 MMBD.
OPEC NGL production has been trimmed to 5.3 MMBD in 2010, up from 4.5 MMBD in 2009, largely reflecting a weaker trend from Iran. Incremental growth to 5.8 MMBD is expected in 2011, as additional LNG trains in Qatar are brought on stream. Sequentially, 0.4 MMBD of 2011 incremental capacity will be added in 1Q11. The IEA’s medium term outlook then anticipates OPEC NGL production will grow to 7.1 MMBD in 2015 with new supplies from Qatar (2015E capacity 1.36 MMBD), Iran (2015E capacity 0.9 MMBD), UAE (2015E capacity 0.9 MMBD), and Saudi Arabia (2015E capacity 1.86 MMBD). OPEC NGL supplies are adding meaningfully to supply.
OPEC crude oil production in November was unchanged at 29.2 MMBD, compared with an estimated call on OPEC crude of 29.1 MMBD in 4Q10 and 1Q11. A surge of militant activity reduced production in Nigeria by 80 MBD in the month, which was offset by increased production from Saudi Arabia. The estimated call on OPEC crude oil for all of 2011 is revised up to 29.5 MMBD. OPEC export schedules indicate OPEC supply should remain fairly constant into 2011. Seasonally, the call on OPEC crude is expected to peak at 30.2 MMBD in 3Q11. Assuming stable OPEC production, excess global oil inventories will decline, putting upward pressure on oil prices.
The outlook for OPEC’s production capacity over the next 5 years remains largely unchanged. OPEC’s sustainable crude oil capacity currently stands at 35.5 MMBD and is expected to grow by 1.4 MMBD to 36.9 MMBD in 2015. Iraq (+1.1 MMBD to reach 3.6 MMBD), the UAE (+0.5 MMBD), and Angola (+0.5 MMBD) are expected to account for the bulk of capacity growth. Production capacity in Iran is expected to decline over the period from 3.9 MMBD to 3.1 MMBD as reinforced sanctions delay new projects and accelerate field decline for lack of needed technology and equipment.
In Nigeria, capacity is expected to increase slightly from 2.7 MMBD currently to 2.8 MMBD in 2015, assuming the fragile cease fire with former militants endures and its proposed new Petroleum Industry Bill does not discourage investment. As it currently stands, the proposed PIB is described by industry sources as `very flawed’ and equivalent to `resource nationalization’. Nigeria’s remaining fields to develop are ¼ to 1/3 the size of its already developed giants but will involve the same costs, with the new law resulting in a disincentive to invest. Nigeria currently produces 2.1 MMBD and would produce more but for militant activity.
Saudi capacity, currently 12.1 MMBD, is expected to decline to 11.6 MMBD in 2015 reflecting normal field decline. It produced 8.3 MMBD in November, and expects its capacity will remain relatively flat to 2015 and possibly to 2020. It has indicated its trigger for adding new capacity would be if global crude demand began eating into the 1.5-2.0 of strategic spare capacity it likes to have available for unexpected supply shocks. If demand growth looks likely to erode this comfort level by 2015, Saudi Arabia stated it would initiate capacity expansion by 2012. Without new investment, decline rates in OPEC production are in the 3.5-5% range, according to a former Aramco official. The IEA estimates combined OPEC and non OPEC normal field decline approximates 3 MMBD.
Iraqi oil production of 2.48 MMBD in November reflects a minimal increase from 2.4 MMBD in 2009. Its goal is to raise production capacity to 3.0 MMBD by the end of next year. The IEA does not expect Iraqi capacity to exceed 3.6 MMBD by 2015. It does have substantial resources to sustain much higher production if it is able to overcome its above ground challenges. It recently increased its estimate of proven reserves to 143 bn B based on a 34% recovery factor, which compares with 259 bn B for Saudi Arabia, 211 bn B for Venezuela, and 137 bn B for Iran. Iraq’s official production target is 12.0 MMBD by 2017, but a panel of experts in the Middle East recently stated production of 4-5 MMBD at that time was a more reasonable goal, with a plateau of sustainable capacity of 6.3 MMBD maintained for 12-14 years. The complexity of building a pipeline through Syria and maritime border issues with Iran will be a barrier to oil export expansion. Iraq stated its goal is to boost revenue, not production.
OPEC’s spare capacity currently stands at 6.1 MMBD, which represents an ample 6.9% of 2011E world oil demand. About 63% of OPEC’s current spare capacity is in the hands of Saudi Arabia. Some 70% of the growth in Middle East OPEC capacity stands to be absorbed by regional demand growth fueled by ongoing subsidies. Assuming world oil demand growth about 1.1 MMBD annually 2012-2015, and relatively flat non-OPEC conventional oil production from 2011, the call on OPEC crude will increase from 29.5 MMBD in 2011 to about 32.4 MMBD in 2015 after adjusting for growth in biofuels, Canadian oil sands, and OPEC NGL production, reducing effective spare capacity (ex Nigeria and Venezuela) to about 3.6 MMBD, or 3.8% of world oil demand (2015E 93.4 MMBD). Oil markets could tighten from 2H11 as spare capacity is reduced. Faster global economic growth implies faster world oil demand growth and even tighter spare capacity.
The global refining environment is expected to remain difficult in 2011, offering little investment opportunity until growth in world oil demand absorbs surplus capacity. Global distillation capacity is expected to increase by 9.2 MMBD by 2015, even though significant surplus capacity persists, with 40% of the expansion in China and 70% in the broader Asia and Middle East regions. China has a strategic goal to be self sufficient in light product demand. Identified global capacity closures since 1Q09 amount to 2.0 MMBD. More rationalization is anticipated but will be slowed by stringent exit regulations and the high cost of closures.
Recent Oil Service industry reports anticipate the US market will move sideways in 2011, with growth in onshore liquids rich plays offsetting a decline in natural gas directed. For the latest updates PRESS CTR + D or visit Stock Market news Today
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