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A Global Perspective On The Outlook For Oil Prices



  • IEA, EIA projections point to significant supply growth in 2018.
  • However, global upstream investment remains depressed as the market relies almost exclusively on anticipated growth in US output to meet growing global demand.
  • Offshore oil production accounts for 30% of total global oil production and as such remains a key component of the global oil market.
  • Investment spending in the offshore sector remains well below prior peak levels from 2013/14.
  • If US production growth slows or tops out (a possible scenario by 2020), a severe global supply deficit in the oil market may develop from 2020 onwards.

In this article we will take a closer look at the latest data and forecasts published by the International Energy Agency (IEA), as well as the Annual Energy Outlook (AEO) published by the Energy Information Administration (EIA). The IEA data will give us a clearer picture of the current state of the global oil industry and more specifically, the outlook for the next two years. The AEO publication will offer us a longer-term perspective and perhaps notably, as we will discuss later in this article, lead us to the conclusion that a significant disconnect exists between valuations in the U.S. onshore Exploration and Production (E&P) sector (NYSEARCA:XOP) and the forecasts that underpin the AEO' s long-term reference case.

In the IEA's monthly publication, the Oil Market Report (OMR) has taken an optimistic view with regard to growing oil output in the U.S, while also forecasting a modest reduction in global demand growth in 2018. In its most recent OMR publication (February 2018), the IEA said that it expects global demand to grow by just 1.4mn bpd in 2018, a modest decline from the 1.6mn bpd growth reported in 2017. On the supply-side, the IEA expects total global oil output to grow by 1.7mn bpd, with 1.35mn bpd of incremental output coming from the United States.

The IEA's assumptions are quite aggressive and would point to a market that will remain prone to excess supply or output growth. Notably, the IEA's assumption regarding U.S. production growth is even higher than the EIA's projection, which is forecasting growth of around 1.2mn bpd in 2018. We would probably defer to the EIA in terms of accuracy in forecasting U.S. production and as such, would suggest that the lower figure is a more reliable forecast for 2018. Furthermore, as outlined in this prior article

This article was written by

Leandro is a Director and Founder of Blue Quadrant Capital Management. He is the portfolio manager for the Blue Quadrant Capital Growth Fund, multi-strategy hedge fund, and the Blue Quadrant MET Worldwide Flexible Fund, a long-only unit trust. He has extensive experience in the industry having worked previously as a research analyst and portfolio manager. Leandro graduated from the University of Cape Town with a BCom (Honors) in accounting and economics. In 2007, he attained the Chartered Financial Analyst (CFA) designation.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

I hope the world is hungry for condensate because that's what shale is producing
MonteQuest profile picture
If not for the GFC demand destruction of 8mbpd to 9mbpd in OECD countries and higher oil prices facilitating the exploitation of LTO, would it have been possible to meet oil demand each year since, with conventional production peaking in 2008? Maybe. We won’t ever know.

Last time I crunched the numbers, at the historical growth rate of 1.5%, oil demand was projected to be 110 mbpd in 2015. But due to demand destruction, 94.6 mbpd was consumed instead. If not for the recession, I doubt that LTO would have closed that “projected” gap of almost 16 mbpd, much less met the 98.4mbpd today. Today, we are wondering if oil demand at 100mbpd can be easily met with LTO. Demand destruction from GFC gave us some breathing room and a short-term glut. Now the question is whether we took enough advantage of it. The world is growing hungry for oil once again.
Well balanced article. With some great long term insights. Thanks.
Its not that rosy. Shale drillers are already being constrained at current production levels.
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