The recent oversupply of oil caused mainly by the extraction of costly reserves in the US and Canada may ease as higher-cost production threatens to shrink shale production, particularly in North America.
In its recent ‘World Oil Outlook’, the Organisation of Petroleum Exporting Countries (Opec) forecasts non-Opec supply may dwindle by 1mn barrels a day to 60.2mn a day in 2020 as “market instability” leads to reductions in spending and drilling.
The report also forecasts supply and demand through to 2040 according to which the non-Opec supply will contract in the last two decades of the period to 59.7mn barrels a day.
As a result, the demand for Opec’s crude will rise to 40.7mn barrels a day, expanding its market share to 37%.
Almost $10tn (in 2014 terms) will need to be invested in the oil industry through to 2040 to develop the required supplies, with $7.2tn of this in exploration and production. Producers outside Opec will need to do the bulk of the spending, investing $250bn a year.
Reports indicate that on account of expensive production processes, shale oil producers will not be able to cope with the current low oil prices. Many North American shale producers have already closed their rigs, cancelled projects and are lowering production.
Opec said: “Shale drillers in the US have slashed spending and cut the number of workers this year as prices have fallen. US tight oil production – the main driver of non-Opec supply growth – has been declining since April 2015. This downward trend should accelerate in coming months, given various factors, mainly low oil prices and lower drilling activities.”
That said, Opec estimates that demand for its crude will slide to 2020, though less steeply than previously expected, as rival supplies continue to grow. The organisation maintains it will need to pump 30.7mn barrels a day by the end of the decade.
That’s 1.7mn barrels more than projected a year ago and 1mn less than what the group had pumped in November.
The 30.7mn barrels of daily output needed from 12 of Opec’s members in 2020 is about 300,000 a day less than required this year. The supply figure, however, excludes Indonesia, which formally rejoined Opec on December 4.
Opec said the non-Opec oil supply growth was expected to be “much lower” in 2015 and 2016 after “the tremendous growth” of 2.23mn barrels a day achieved in 2014.
While non-Opec oil supply was estimated to grow by 1mn barrels a day in 2015 to average 57.51mn barrels a day, it forecasts a contraction in non-Opec oil supply in 2016.
In its latest report, Opec assumes that prices will rise to average $80 a barrel in nominal terms in 2020, and $70.70 in real terms. Last year, it had anticipated nominal prices of $110 and real levels of $95.40.
That means the value of the group’s output in 2020 would be $218bn less than estimated a year ago, when it first embraced the policy to safeguard market share.