Oil market forecasts to 2030 The Oxford Economics central scenario sees world GDP growth in 2021-30 accelerating somewhat from the pace in 2011-2020 as the adverse after-effects of the 2008-09 global recession fully unwind and faster growing countries make-up a larger share of the world economy. But overall the pace of growth in the period is not expected to return to the rate of expansion seen in the ten years to 2008. Again, growth is likely to be led by the larger emerging markets, which will continue to grow in importance and with China set to overtake the US in terms of GDP on a PPP basis soon after 2020. The rise in power of the emerging markets will mean that demand for primary fuel sources such as oil, coal and gas will continue to climb notwithstanding likely further moves to curb greenhouse gases; by 2030, China is expected to be the second largest oil consumer in the world after the US. But the ongoing efforts to reduce emissions by developed countries, and by some developing countries, will see a lower rate of growth of demand for oil, especially if the move to electric powered cars really takes off as transport remains the key driver of demand for oil. In its November 2009 study of energy demand prospects to 2030, the reference scenario (or base case) presented by the IEA sees world primary energy demand increasing by 1.5% pa between 2007 and 2030, equal to an overall rise of 40% from 12,000 million tonnes of oil equivalent (Mtoe) to 16,800 Mtoe, driven mainly by Asia followed by the Middle East. The breakdown shows that fossil fuels will remain the dominant source of primary energy, accounting for over 75% of the overall increase in energy use over the period to 2030. Demand for coal is projected to show the biggest absolute increase over the period, while oil remains the single largest fuel, albeit its share dropping from 34% currently to 30%. The IEA figures show demand for oil (excluding biofuels) growing by 1% pa over the period, rising from 85 mb/d in 2008 to 105 mb/d in 2030, with all of the increase in demand coming from non-OECD countries, while OECD demand actually declines. The Oxford Economics forecast of long-term oil demand is similar to the IEA’s, showing a rise of 1.1% pa over the period 2010-30 to 107.2 mb/d. The US Energy Information Administration and OPEC also forecast oil demand to grow by 1.1% pa over the period 2010-30. On the basis of the long-term oil demand profile noted above and the projected growth of the world economy, Oxford Economics expects oil prices (Brent, nominal terms) to rise to US$180pb in 2030, a little below both the IEA projection of US$190pb in 2030 and the EIA’s forecast of US$186pb. But with increasing efforts in the developed world to reduce the use of hydrocarbon fuels and develop alternative energy sources, the pace of increase in real oil prices is forecast to slow to about 1½% pa in the period 2020-30 from 2½% pa in 2010-20. We forecast the price of oil in constant 2008 US$ terms at US$110pb. This would take real oil prices well above the record highs seen in the late-1970s and early-1980s, in turn reflecting the lack of investment in the oil sector in recent years – largely due to the long period of low world oil prices in the 1990s and early-200s and then the impact of the financial crisis just at the time when investment was beginning to pick up again. Slow growth presents downside risk to the forecast… There are obvious risks to this forecast. In the near term, the main danger is that the global economic recovery proves to be weaker than generally expected, with a dip back into mild recession still possible as the temporary factors that are supporting growth – such as restocking and monetary and fiscal policy – go into reverse over the next year or two. In addition, world stocks are also quite high – inventories held by OECD countries were 2.7bn barrels in Q1 2010, equal to 58 days of forward cover and some 95m barrels more than the 5-year average for the time of year. These factors could weaken oil demand, meaning even weaker prices in the near term; but lower prices would act as a dampener on investment, thereby potentially adding to long-term capacity problems and upward pressure on prices. There are also downside risks from the output side. Some OPEC countries such as Nigeria and Iraq are looking to lift output sharply, which if successful would weigh on prices over the next few years, while Saudi Arabia currently has some 3.75 mb/d of unused capacity that could start to come onstream fairly quickly. …but there are also significant upside risks On the other hand, the recent rise in oil prices to US$85pb seen as recently as April – despite much lower OPEC adherence to quota cuts – suggests that the strength of oil demand may be rather stronger than currently estimated. Since mid-2009, the pace of growth in the emerging markets, and in particular Asia, coupled with the upturn in North America, has proved stronger than expected and may continue to surprise on the upside. The very severe winter in the northern hemisphere boosted energy demand in Q1 2010 and as such there is little evidence that this demand is slackening significantly in Q2. The IEA expects oil demand to ease back to 86 mb/d in Q2 from 86.3 mb/d in Q1 before starting to climb again in the second half of the year, but if in fact demand continues to climb then overall demand for 2010 could be quite a bit higher than currently projected. At the same time, there are uncertainties about the pace of output rises in Iraq. With electoral uncertainties there persisting, there is an increasing risk of the emergence of a weak coalition government that is unable to deliver the reforms and security needed to ensure that the planned foreign investment in the oil sector proceeds in the near term, thereby setting back its planned sharp production increases. In these circumstances, it is possible that there could be a further short-term spike in oil prices, perhaps to over US$100pb. Looking further ahead, there are other important upside risks to the central oil price forecast, including the potential for further tensions in the Middle East, which currently appear most likely to be linked to the situation in Iran and its nuclear ambitions. With Iran under its current leadership seemingly on a collision course with the West, further sanctions are possible, while there remains the risk that Israel might take military action against Iran’s nuclear facilities if it believes that the UN sanctions regime is not tough enough. In this situation, there is the risk not only that Iran’s 2.4m b/d of oil exports could be halted, which on its own would be a major blow to world supplies as it is the world’s fourth largest oil exporter (after Saudi Arabia, Russia and Norway), but also that Tehran might respond by blocking shipping in the Gulf. Some 40% of all sea-borne oil trade (20% of total oil trade) passes through the 21-mile wide Strait of Hormuz, just off the coast of Iran, an easy target for disruption. Additional upside risks include the possibility of more general Middle East conflict, political upheaval in a major African producer such as Nigeria (which faces elections in April 2011) or Angola, or heightened tensions between the current leadership in Venezuela and the US. Higher prices induced by such tensions would inevitably curb demand and lead to greater energy switching, ultimately driving down prices over the longer term. Another significant factor over the next few years will be the impact of currency movements, in particular trends in the US dollar. In the period from 2003-2008, the price of oil (as well as some other commodities) rose strongly when measured in US$ terms but it was more stable when measured in terms of gold or euros, both of which were a better store of value over the period. IMF analysis suggested that 40-50% of the climb in the oil price in this five-year period was the result of US$ weakness and the recovery of the US$ in 2009 probably played a part in the fall in oil prices from 2008. After a slight decline in 2010, the Oxford forecast sees the US$ strengthening – but any extended period of US$ weakness in the years ahead could see oil prices rising faster than in the central scenario.
Posted on: Tue, 20 Jan 2015 05:25:31 +0000
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