This is the first edition of the yearly Energy Aspects Medium-term oil market outlook. The publication—looking out over the next five years—ensures our long-term forecasts reflect the latest fundamental drivers at the prompt, such as economic shifts, technology changes, and regulatory and political dynamics.
Oil markets, over the next five years, can be split into two distinct periods: an initial spell of liquid oversupply (2020-2022) early in the forecast; followed by years of persistent deficits (2023-2024). Such a dichotomy would normally imply a roller coaster for prices, but the predominance of NGLs in the surplus years clouds these conclusions. Although liquid surpluses are initially forecast, crude balances will remain relatively tight and, hence, crude prices will not lose too much momentum. We do have downside pricing momentum encompassed in our 2021 forecast—with Brent dipping $10—but this is more attributable to macroeconomics, and hence a demand-side story, rather than a consequence of excess supplies. More simplicity can be applied to the back-end of this outlook, when oil markets (including NGLs) flip back towards undersupply. The persistent deficit years of the forecast take hold because earlier years of weak Capex leave the industry (excluding shale) struggling to appease still rising demand, supporting a renewed trend of rising prices. Brent crude prices, in nominal terms, rise into the $80 a barrel territory towards the latter stages of our five-year outlook and this is without the additional, somewhat unpredictable, upside support that geopolitical shocks intermittently provide.
As most of the market runs liquids balances (including the EIA, IEA and OPEC Secretariat) in their fundamental analysis, bearish liquids balances act as a deterrent to establishing long positions, capping medium-term crude prices. Rampant liquids growth—led by US NGLs—defines molecule balances from late-2019 onwards. While these builds will do little to alleviate the crude tightness, global liquids balances show large builds in the early part of the next decade. This is, yet again, largely an NGLs story with global NGLs production set to rise by 0.5-0.6 mb/d y/y in 2020 alone as US midstream companies bring online associated infrastructure projects. This is a direct consequence of the growing lightness of US crude (80% of incremental Permian production will be in the 45+ API category) and, with it, associated liquids. Even among other non-OPEC nations such as Russia and Middle Eastern OPEC, a growing focus on gas and petrochemicals has meant upstream projects are increasingly biased towards lighter crude streams, adding to growth in condensates and NGLs.
Our supply outlook shows an expansion of 5.1 mb/d between 2019 and 2024, an amalgamated metric that hides a multitude of factors. First, non-OPEC supplies dominate growth—adding 3.7 mb/d—which is significantly below the predicted demand response (+5.3 mb/d) giving OPEC (notably Saudi Arabia and Iraq) an increasingly important role in balancing fundamentals in the medium-term. Second, unconventional liquid streams dominate the non-OPEC supply response—led by shale (+2 mb/d, 2019-2024), NGLs (+1.2 mb/d) and oil sands (+0.7 mb/d)—as non-OPEC conventional supplies broadly flatten. Third, suppressed by years of subdued investments, the latter stages of the medium-term supply outlook significantly lag demand, as heightened depletion rates restrain growth.
The demand story is more straightforward. The general trend is for global growth to decelerate due to rising underlying oil prices, efficiency gains, slowing economic growth (albeit modestly and on a volatile trend) and the world increasingly moving towards augmented electrification (particularly in the buildings, industry, agriculture and transportation sectors). Growth only eases gradually because of persistent supports—road, aviation and shipping—as roughly 140 million people join the global middle class each year (see Long-term energy market outlook, November 2018). Overall, demand growth averages 1.1 mb/d a year, subject to a multitude of wildcards, predominantly IMO 2020 (boosting marine diesel while dampening fuel oil) and a potential economic slowdown (late-2020/early-2021).