Oil Prices Stay High – but spare capacity buffer should build

Oil prices are expected to remain high over the next two years as the market will remain tight by historical standards. Supply additions are expected to outpace demand growth, resulting in slightly softer oil balances in 2013. The market will remain similarly tight in 2014 as supply growth slows and demand accelerates with the global economy. Oil prices will likely remain volatile around high levels given the market tightness and risks to supply.
This article appeared in Vol. 9, No. 5 - 2013


Source: Nordea Source: Nordea Income growth, economic activity and population growth are vital drivers of oil demand. Global oil demand is expected to increase at a higher pace in 2013–14 than in the previous two years as economic growth picks up, but OECD demand will continue to decline owing to efficiency gains, fuel switching and subdued economic growth. Non-OECD countries contribute to all oil demand growth, which averages 1.1 MMbpd over 2013–14. Structurally higher economic growth, rising income and population growth in emerging economies is expected to outweigh efficiency gains in oil use and a switch to other energy sources. Demand for transportation is expected to remain the primary driver of global oil use, accounting for around 52% of total oil demand.

Global oil supply is expected to grow in the forecast period mainly driven by a healthy expansion of oil production capacity in North America, Iraq, Brazil and by an increase in OPEC Natural Gas Liquids (NGLs). Non-OPEC is expected to account for the lion’s share of new capacity brought online. We expect the past few years’ impressive growth in US shale oil, tight oil and Canadian oil sands production to continue, although infrastructure and environmental issues may restrain future advances. In Brazil local content requirements and cost inflations could continue to challenge the country’s expansion plans. We only foresee a slight resumption of the oil production in Libya, Yemen and Sudan/South Sudan in the forecast period after political unrest has cut oil production in total by around 1 MMbpd. OPEC capacity is expected to increase in the forecast period.

Capacity expansions in Iraq, Angola, United Arab Emirates and the return of Libyan oil are expected to outmatch the natural production / sanctions-related declines in Iran and smaller declines in Nigeria and Venezuela. How long Iran can stand the EU/US imposed sanctions is uncertain; we expect production to gradually resume in late 2013, but the political situation could take a twist for the better or worse before or after this time. Political unrest and unplanned production outages are expected to leave global oil supply at risk.


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