Oil glut to swamp demand until 2020

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The Financial Times / November 10, 2015

The oil market will remain oversupplied until the end of the decade as an unstoppable push for cleaner fuels and greater efficiency offsets the effect of lower prices, the world’s leading energy forecaster said.

In its closely watched annual outlook, the International Energy Agency (IEA) said oil demand would rise by less than 1 per cent a year between now and 2020, a slower pace than necessary to quickly mop up an oil glut that has driven prices to multiyear lows.

The slowdown in oil demand growth follows a near 15-year surge in consumption, driven by the rapid industrialisation of China and other emerging market economies. But Beijing is now moving away from dirtier fuels and to less energy-intensive growth as it moves towards a more consumer-led economy.

“We are approaching the end of the single largest demand growth story in energy history,” Fatih Birol, executive director of the IEA, told the Financial Times ahead of the launch of its long-term forecasts. Mr Birol was appointed IEA head in September after 20 years with the west’s energy watchdog.

“Demand is not as strong as we have seen in the past as a result of efficiency [and climate] policies [globally],” he added, saying the growth in renewables will further restrict demand for oil.

The IEA does not expect crude oil to reach $80 a barrel until 2020, under its “central scenario”, as excess supplies are slowly soaked up.

After 2020, oil demand growth is expected to grind almost to a halt, increasing just 5 percent over the next 20 years, the IEA said.

The IEA forecasts oil demand will not hit 103.5m b/d until 2040 — it is currently 94.5m b/d. Growth will be “moderated” by a return to higher prices, efforts to phase out subsidies and the switch to alternative fuels — especially in developed markets.

“Collectively, the United States, EU and Japan see their oil demand drop by around 10m b/d by 2040,” the report says.

Pledges made in advance of the Paris climate talks in December, Mr Birol said, would be a further catalyst in the move towards a low carbon and energy efficient future.

“Big energy companies are underestimating the effects of all of these things on the demand side,” Mr Birol said.

The IEA chief said a prolonged period of lower oil prices could not be ruled out. In this “low oil price” scenario, the agency said prices would stay close to $50 a barrel until the end of the decade and would not rise to $85 until 2040.

The collapse in Brent crude — from $115 a barrel in June 2014 to below $50 — has battered the budgets of producer countries and forced the world’s biggest oil companies to slash investment.

After years of oil above $100 a barrel, the “lower for longer” mantra has become part of the industry lexicon, promoted by traders, bankers and even the IEA itself as global inventories swell and storage fills up. The global oil market remains oversupplied by at least 1m barrels a day.

Since November, production outside of the Opec cartel from countries such as the US has taken a hit. But it has been far more resilient than expected. Meanwhile, production from the cartel — led by Saudi Arabia and Iraq — has increased, helping to keep prices low.

The IEA said “a clear pathway” had opened for additional Iranian barrels.

Saudi officials warned this week that investment cuts and oil prices at about $50 for a prolonged time would have a “substantial and long-lasting” impact on future oil supplies and could lead to a price spike.