OPEC Thinks This Whole 'Shale' Thing Might Be a Thing
OPEC's annual World Oil Outlook is known internally as the "WOO".
That perhaps overstates the surprise factor in the oil-exporter club's long-term forecasts. Demand for OPEC's favorite product is projected to reach 111.1 million barrels a day by 2040 -- or about the same as OPEC has projected for several years:
This is to be expected -- which isn't to say OPEC's forecasters are necessarily wrong. Just that it's not really in OPEC's interest to give serious discussion to, say, disruptive things like "s-curves" when it comes to electrified transportation.
The nearer-term stuff in the report released on Tuesday was interesting, though. What follows are some charts illustrating how OPEC's view on a few key things for the period through the early 2020s has evolved over the past several years.
First, the outlook for global oil demand has perked up significantly:
The biggest shift occurred in 2015, as lower oil prices worked their usual magic on demand. This year's forecast gets a special boost in 2020 as tighter standards on marine oil, due to kick in that year, lead to a surplus of cheaper high-sulfur fuel oil that gets absorbed by the power-generation sector instead. As an aside, I suspect that is a weak-point in OPEC's assumption due to rising penetration of renewable power and natural gas, as well as the competition provided by cheap coal in some markets.
In any case, this anticipated increase in demand has led to a profound shift in OPEC's expectations for how much oil it will be producing:
It isn't just that the projected size of the market has expanded; some of OPEC's competitors have turned out to be less productive than expected. Take projections for 2019, for example. Here's how the global supply picture for that year stacked up in 2014 and currently:
Russian output has done better than OPEC expected back in 2014; hence, the group has had to forge an alliance with Moscow on supply cuts.
Of course, North America has turned out to be more productive than OPEC expected only a few years ago. Indeed, the biggest "woo" in this year's WOO concerned tight oil (of which shale is a sub-set). Take a look at how OPEC's medium-term projections for that segment of supply has moved around:
The key lines to compare there are 2016 and 2017. This time last year, OPEC was projecting tight-oil producers to succumb to low prices and rein it in. Now, production is expected to be 75 percent higher in 2022 compared with 2016. The big difference is that OPEC now expects that at least some of the productivity gains made in America's shale basins in recent years will prove to be lasting, and not merely temporary boosts provided by discounts from struggling oilfield-services firms.
This shift largely explains why, despite expecting higher global demand in the medium term, OPEC has trimmed expectations of its own supply. The club's crude-oil production in 2022, projected to be 33.5 million barrels a day, is less than 1 million barrels-a-day higher than for 2016.
The implication is that the voluntary supply restraints, agreed to roughly a year ago and originally envisaged lasting for perhaps a year, will need to stay in place a lot longer. This may overstate the curbs on individual countries. OPEC doesn't provide a breakdown of each member's expected output, but it's quite possible that involuntary production curbs -- Venezuela being a prime example -- would free up space for other members such as Iran and Iraq.
OPEC, is more bullish about its own prospects beyond the medium term, as it expects tight-oil production to peak in the mid-2020s. That expectation is critical and -- given that OPEC has been slow to recognize shale's impact -- may betray a lingering unwillingness to acknowledge the important role of access to capital and logistics -- not just geology -- in the tight-oil boom.
That aside, OPEC's latest WOO reaffirms that it regards itself as the bedrock of the oil market in the long term:
Thus, the long-term focus for additional liquids demand remains on OPEC.
In case you haven't heard, some recent events involving one of the club's senior members should underscore just how disconcerting that statement is.
To contact the editor responsible for this story:
Mark Gongloff at email@example.com