A "New Normal" for the Oil Market
IMF Blog, October 27, 2016
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- Authors: Rabah Arezki, Akito Matsumoto
- Published: October 27, 2016
Overview
- Authors: Rabah Arezki, Akito Matsumoto
- Date: October 27, 2016
- Core thesis: Shale oil production, slower emerging-market growth, and global efforts to cut carbon emissions have created a “new normal” implying oil prices are unlikely to return to pre-collapse highs.
The "new" oil supply
- Shale-oil production unexpectedly added 5 million barrels per day to supply, contributing to the global supply glut and to the oil price collapse that started in June 2014.
- The price collapse led to a massive cut in oil investment, but production was slow to respond, keeping supply in excess.
- Shale production showed resilience to lower prices, with drillers significantly cutting costs and improving efficiency, enabling major players to avoid bankruptcy.
- Reduced investment is expected to result in lower production by non-OPEC countries in 2016, but production still exceeds consumption.
- Many experts expect oil markets to balance in 2017, albeit with high level of inventory.
- Uncertainties in supply include:
- The cost associated with extraction.
- Production from shale "fracklog"—drilled but uncompleted wells that can add to production flows in a matter of weeks, altering short-term production dynamics compared to conventional oil with long lead times.
- OPEC countries and Russia have been increasing output, and Iran’s return to markets has added more supply.
- Recent developments:
- OPEC members have recently agreed to cut production, but that agreement is yet to be finalized.
- Recent data suggest shale-oil production may again be more resilient than expected.
- Anticipation of an OPEC production cut in cooperation with other exporters has boosted prices to levels that will further stimulate output by many shale producers.
The "new" oil demand
- Falling prices spurred oil-demand growth to a record high of about 1.8 million barrels per day in 2015.
- Demand growth is expected to slow to the trend level of 1.2 million barrels per day in 2016 and 2017.
- Using basic estimates for demand elasticity with respect to price suggests the “price effect” accounts for a 0.8 million-barrel per day increase in demand.
- A sizable share of oil demand growth is attributable to the price drop rather than income gains.
- With limited scope for further declines in prices in dollar terms, future increases in oil demand will depend largely on prospects for global economic growth.
- Demand drivers and risks:
- Recent years’ demand growth has been driven by China and other emerging-market and developing countries.
- China accounts for just 15 percent of world oil consumption, but its contribution to oil demand growth is significant because its economy is growing much faster than advanced nations.
- Further slowdowns in emerging and advanced economies, and structural shifts in emerging economies (notably China’s shift from an investment- and export-led growth model to a domestic-demand-led growth model), can significantly change the demand picture.
- Medium- to long-run risks from climate policy:
- The transition away from oil and other fossil fuels clouds the outlook for oil demand, although lower prices may delay the transition.
- Energy policies will have to be altered significantly to meet the goals set at the December 2015 Paris Climate Conference (COP21), and a significant portion of oil reserves will have to remain under the ground and unburned.
- Lack of clarity about the specific actions needed to achieve COP21 goals adds to uncertainty about the oil-demand outlook.
Price outlook and market dynamics
- Futures markets point to slight gains in oil prices, but recent shifts in futures-price curves suggest prospects for higher prices have been worsening.
- Downward revisions to global growth forecasts, especially for emerging markets, have offset supporting factors such as price-driven demand growth.
- Turmoil in financial markets and a strong dollar have put downward pressure on oil prices.
- Combined trends—secular drop in petroleum consumption in advanced economies, growth of shale, and slower global growth—point to a “lower for longer” scenario for oil prices.
Source: A "New Normal" for the Oil Market — Rabah Arezki, Akito Matsumoto, October 27, 2016.
Content in this bundle
- 石油市场的“新常态”; IMF博客
- 原油市場の「新常態」, ラバ・アレズキ 、 松本哲人, 2016年10月27日
- WEOSpecialAPR15
- «Новая норма» для рынка нефти, Рабах Арезки и Акито Мацумото, 27 октября 2016 года
References
- عربي
- historic collapse
- https://www.imf.org/wp-content/uploads/2016/10/res-oilmarket-chart1.jpg
- prospects for global economic growth
- https://www.imf.org/wp-content/uploads/2016/10/res-oilmarket-chart2.jpg
- lower prices may delay the transition
- https://www.imf.org/wp-content/uploads/2016/10/res-oilmarket-chart3.jpg
- lower prices in the past year
