The 2014 -15 oil price crash led to sharp pullbacks in upstream capex, leading to the “conventional wisdom” (as held by the IEA, EIA, and OPEC Secretariat) that a supply gap will open up by the end of the decade due to limited greenfield projects and accelerating decline rates… but Citi’s analysts disagree with this consensus. In their opinion “to be sure, oil markets are tightening over 2017 -18 as non-OPEC declines set in, and petrostates adhere to a production cut for now , reflected in recent sharper global inventory drawdowns , but…”
A New Hope?
A revolution in unconventional supply upturned the oil market, bringing $100+ prices back down to earth, and may now cap prices at $70 or lower out to 2022. Shale brought an unprecedented amount of “short -cycle” supply to the market. Looking at various indices of cost s as well as medium -term supply -demand balances helps zero-in on a base case $40 -65 crude oil price range out to 2022.
The Petrostates Strike Back
Saudi Arabia and OPEC as regulator of prices? Current OPEC/non -OPEC production cuts have helped accelerate rebalancing, likely bringing oil prices up to the $60s in 2017 -18, ahead of potential IPOs against a background of fiscal tightening, but $60 jolts shale supply upwards , setting up OPEC for the next round of the market share battle against shale, which could push 2019 -2020 oil prices down —perhaps well below $50 —before tightening up again. OPEC itself has significant supply growth potential, with just three GCC countries capable of adding 2 -m b/d in the five -year horizon depending on when they invest .
The Return of Shale and other unconventionals
Shale rig counts are rising fast, and produc tivity gains continue, though cost inflation remains to be watched. The key message is: don’t underestimate the growth potential of shale and other unconventionals, but also don’t overestimate the acceleration of decline rates. Meanwhile, there is a health y pipeline of already sanctioned non -OPEC projects that can offset much of these declines. Citi’s experts explain:
While markets tighten heading into 2022 and onwards on ongoing demand growth and supply declines , the medium -term growth pot ential of other unconventionals like deepwater and oil sands —also seeing technological improvements and cost deflation —could also neutralize tightness in this timeframe.
To what degree can Saudi Arabia and OPEC continue to act as regulator of prices ? Citi believes that, despite recent agreement s, OPEC market power has been severely limited by the rise of short -cycle oil, the decreasing oil intensity of economic growth, the availability of low -cost oil in Iran, Iraq and Venezuela, and the potential for supply surges from Russia and the return of disrupted oil in Libya and Nigeria.In conclusion:
Without a regulator, the oil patch is for the first time in decades open fully to the market’s vicissitudes; with potential price swings of $20 -30/barrel per year due to inventory swings, will this restrain capex enough to make a difference?