A New World Order? – Global Crude Supply and Demand Through 2025

Overall oil prices and the differentials between the world’s different benchmark crude grades have been on a rollercoaster ride over the past decade. In the last eighteen months - since June 2014 – rising production of U.S. shale crude together with oil producer cartel OPEC’s decision not to curb output in response - have led to significant worldwide supply and inventory surpluses that are hurting producers and providing a windfall to many refiners. Today we review a new report from Turner Mason & Company that offers a detailed analysis of global crude oil supply and demand drivers and pricing over the next 10 years.

The oil market (including prices) is driven by a large number of factors and influences including those that are characteristic of commodities such as supply/demand fundamentals, technology breakthroughs, and new discoveries as well as unpredictable influences such as politics, OPEC decisions, weather, economic conditions, and government regulation (to name but a few). These factors together have contributed to rampant and unpredictable oil price volatility in the past 10 years. Against this backdrop of uncertainty, energy companies must plan, operate and build their businesses. Major project costs often run into billions of dollars with lead times of 5-10 years or more. Before these projects are completed, market shifts can cause margins to evaporate or soar unexpectedly. It is therefore essential that all segments of the industry, upstream, midstream and downstream analyze the potential of such volatility to impact their plans in order to survive and make appropriate investment choices.

Turner Mason & Company (TMC) collaborated with a major upstream service provider to evaluate upstream and downstream fundamentals that they believe will determine longer-term crude prices and relationships. The resulting report titled “The Evolving New World Order / Rebalancing Global Oil Supply in the Next Decade” provides a detailed and comprehensive understanding of global crude oil supply and demand drivers and pricing over the next 10 years to 2025.

The report contends that oil markets are at a critical juncture today because global oil supplies are out of balance with demand. The reasons for that imbalance are in large part due to the 4 MMb/d increase in light tight oil (LTO – shale oil) production seen in the U.S. over the past five years since 2011. Growing U.S. LTO output during an era of high crude prices between 2011 and 2014 pushed out imports of most light sweet crude from the U.S. - increasing supplies in other markets. At the same time major producers like Saudi Arabia, Iraq and Russia also increased production. This surge in crude production occurred at a time when the average growth in crude oil demand has been static (see Figure #1). The resulting excess of supply over demand put downward pressure on crude prices from the second half of 2014 onwards. When OPEC countries chose not to respond by cutting production at their November 2014 meeting, prices for the international benchmark Brent crude fell further and rapidly to $50/Bbl levels that were 60% below previous highs over $110/Bbl. The report concludes that after a period of chaos while the world deals with the current supply glut, Brent crude prices should recover to the $60-$70 range under “reference case” assumptions then rise gradually over the next decade to 2025 as production shifts to higher cost fields before jumping to a new higher tier above $100/Bbl as moderate cost oil depletes.

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