In recent years, U.S. shale has thrown in another unknown in the mix of factors
driving the price of oil. This year, shale output forecasts combine with OPEC's
production cuts, geopolitical factors, and unexpected outages to further complicate
supply/demand and oil price forecasts by Wall Street's major investment banks.
The biggest banks remain bullish on
oil prices, expecting moderate price gains by the end of the year, even after
last month WTI prices dropped below $50 for a couple of weeks.
But analyst projections about oil global supply and demand are increasingly
diverging, because expectations of the combined effects of OPEC's cuts, U.S.
shale production, new oil discoveries, and new project start-ups also differ
a lot.
Goldman Sachs, for example, expects a "material
oversupply" in 2018-2019, due to the increase in mega projects production
in 2017-19 as a result of the record spending in those projects between 2011
and 2013. Short-cycle shale output will also add to the glut, says Goldman,
projecting an additional 1 million bpd to global supply by 2018-2019 coming
from the mega projects sanctioned before the oil price crash and from U.S.
shale output.
Morgan Stanley, however, begs to differ, and has recently said that "by
2020, we estimate that [around] 1.5 million bpd of demand will need to come
from projects that have not been sanctioned yet, but that have break-even
oil prices of $70-75 a barrel."
UBS, for its part, expects a 4-million-bpd supply gap by 2020.
"Beyond 2017, the impact of a collapse in longer-cycle conventional investment
over 2014-16 begins to be felt. 2015 saw just six major upstream projects
totaling [some] 0.6 million bpd ... versus the 3-4 million bpd average, and
2016 has seen just one major liquids project sanctioned," UBS strategist
Jon Rigby told Reuters.
Analysts and industry bodies warn of a supply crunch, especially after 2020,
when the effect of the significantly lowered investments in conventional projects
during the downturn will show. The International Energy Agency (IEA) sees a shortage in
oil supply after 2020, "unless new projects are approved soon." According
to the IEA, supply could lag demand in a few years, which could lead to a surge
in oil prices.
"In the next few years, oil supply is growing in the United States, Canada,
Brazil and elsewhere but this growth could stall by 2020 if the record two-year
investment slump of 2015 and 2016 is not reversed. While investments in the
US shale play are picking up strongly, early indications of global spending
for 2017 are not encouraging," the IEA said in a report last
month.
According to Wood
Mackenzie, although projects around the world slated for final investment
decisions (FIDs) will double this year compared with 2016, and prospects
for 2017 are largely looking good, "the longer-term deepwater pipeline is
more challenged."
The oil price slump has not only deferred some investment decisions, it has
also forced companies to scale back exploration spending for conventional oil.
Last year, total global discovered volumes of oil and gas combined hit their
lowest since the 1940s, according to Rystad
Energy. The Oslo-based consultancy sees exploration activity slowly picking
up from 2018.
Although last year's low discovery volumes won't have an immediate effect
on global supply, they could influence supply a decade or so into the future
because of the long lead-time in sanctioning conventional oil developments
and actual production start-ups.
Meanwhile, short-cycle U.S. shale is now more flexible in scaling back or
resuming production, depending on the price of oil and well economics. This
adds another conundrum for investment banks in predicting oil prices - how
fast U.S. supply could grow and how many barrels it could add on the global
oil market.
