ENERGY INTERNATIONAL RISK ASSESSMENT (EIRA)
AN INDEPENDENT MONTHLY REVIEW
November 2016
VOLUME 4
ISSUE 11
 
Oil to acquire Chinese and Hindi accents

The latest World Oil Outlook (WOO) report authored by OPEC analysts could be dismissed as a self-serving pacifier based on wishful thinking. And yet, the cautious assumptions projected into the distant future seem to bear some semblance to a solid prediction of the inevitable surge in oil demand and, subsequently, of the prices.

The OPEC strategists envisage an increase in demand of some 6.2 million barrels per day from 93 million barrels per day in 2015 to 99.2 mb/d in 2021. At average, in the next five years, the demand would climb up to annual increase of 1 million barrels per day.

This is a mid-term forecast. In the short-term, much will depend on the moment of truth scheduled for 30 November when the 14-member OPEC club will have to deliver on its declared intention to cut oil output by as much as 2 percent. So far, no hints have trickled out on whether there is a consensus among the heterogeneous members states of the embattled group. It remains unclear which exactly countries will sign up to the drastic measure aimed at putting upward pressure on the beleaguered global prices.

For the moment, Iran is in no mood to stifle its gradually increasing oil production, quite a relief after years of suffocating international sanctions. Iraq is neck-deep in a tense and ands open-end war with the Islamic State militants who still control large portions of it territory, and is engaged in turbulent verbal tug-of-war with the Provisional Regional Government in Iraqi Kurdistan who are reluctant to cede too much of the revenues reaped from oil exports from the field under their de facto jurisdiction. At the same time, internal calamities have overwhelmed the governments of Venezuela and Nigeria, curbing the prospects of steady flows from these major providers of oil for the global market.

This apparent disparity in the immediate national interests of major OPEC actors does not give comfort to the oil exporters already severely ravaged by low price environment and the bleak prospects of the demand bouncing back to the pre-Saudi Arabia’s decision to depress prices in order to oust US marginal shale oil producers.

A dash of hope has been sprinkled into the report by the long-term forecast. Based on the assumption that OPEC Reference Basket (ORB) price for 2016 will circle around $40 a barrel, the experts on the OPEC payroll predict that there would a modest growth that would add only $5 per annum in the time span of the next five years to reach $65 by 2021.

Despite the current persisting ‘glut’ on the oil market, OPEC experts strongly believe in the coming rebalancing. “OPEC will have to supply an additional 8.9 mb/d (million barrels a day) between 2015 and 2040”, they claim, which is surprisingly similar to the forecasts made by Russian oil energy company, Rosneft, analysts.

Igor Sechin, CEO of Rosneft, addressing the V Eurasian Forum in Verona in October, also claimed that by 2040, global oil demand would surge by 15mbd. Approximately 6mbd to 8mbd will de added to the overall supply through shale oil production, while the rest will depend on conventional oil fields. Given the rolled back investment plans by most of the energy majors, the market would face a definite shortage of production capacities by the time demand picks up.

Moreover, Rosneft displays excessive optimism operating on the premise that balance of supply and demand would be restored in the next 1-2 years with average price to exceed $55 per barrel.

It might be enough to stimulate E&P but would not be sufficient to provide a powerful impetus for the whole industry. OPEC experts claim that in the time period from 2016 till 2040 investments in upstream (in 2015 prices) should total $7,4 trillion, or roughly $300bn a year. The investment demand among OPEC countries equals some $65bn a year, and non-OPEC producers require $230bn a year. Moreover, investments in downstream are estimated at $1,5 trillion and $1,1 trillion are to be channeled into midstream. Finding the financial reservoirs and investors eager to make such a mammoth commitment would be a task of biblical proportions.

Nevertheless, there is a fine print not found in the OPEC report. An extraordinary number of energy experts have been routinely placing bets on a ‘pivot to Asia’ with the trend pointing out to the new “areas of growth.” Lately, oil demand in Europe has decreased by some 5% while demand in Asia has skyrocketed 40-fold. Asia, and China in particular, together with India are viewed as the main drivers of demand in the next decades.

Remarkable enough, European business people are taking the trend seriously and are ready to adjust growth strategies and investment plans to the emerging ‘brave new’ reality. Mauro Moretti, CEO of the Italian industrial company Finmeccanica, envisages the “rebalancing” of the global order with Asia replacing the West at the top being “more wealthy, better educated and technologically advanced.” After Brexit is finalized, in ten years time, the European Union will have an aggregated GDP of $15 trillion while Asia will excel with $25 trillion. Mr. Moretti’s believes that “in 10 years the East will exceed the West in terms of technological development.”

Given the more or less sustainable development of Asian tigers or dragons, with newcomers’ states ready to jump on this bandwagon, and since neither the renewables nor nuclear power generation offer a money-wise alternative, oil will remain the bloodstream of the newly industrialized nations, which are diversifying its profiles with accent on knowledge/high-tech economies.

In fact, it corresponds with the OPEC gurus’ forecast that developing countries (one should read “Asia” or rather the Asian Rim of the Pacific plus India and Iran and Turkey) will remain at the forefront of demand growth, and would heat up their appetite for oil to 25 mb/d over the period, to reach 66.1 mb/d by 2040. It would be fair to conclude that in the next quarter of a century, oil demand growth would be generated in Asia and spelled in Chinese and Hindi.

 

SIMILAR ARTICLES
ABO | Oil, down and up

In March crude prices decreased because of finance sparked. Instead, the increase in prices that took place at the end of March dealt with the Libyan output.

Demostenes Floros|Geopolitical and economic analyst

Saudi Arabia is racing against time

A new Finance Minister was designated in Saudi Arabia. Mohammed Al-Jadaan replaced Ibrahim Al-Assaf who was running that department for the last two decades. The new financial chief of the Kingdom is not a neophyte: since January 2015, he was the Chairman of the Capital Market Authority, or CMA, equal to a minister by rank, and before he was pursuing a lawyer’s career as partner in a law firm, Al-Jadaan & Partners.

Iran and India probe ground for a long-term tango

The blatantly tough, ultimatum-style huge pressure exerted by Iran on India in the case of untapping Farzad B gas field seems to have paid off. Indian energy major, Oil and Natural Gas Corporation (ONGC) pledged to offer an acceptablefinancial investment model for the development of the field in order not to alienate the Iranians who looked like losing patience and temper with its peers.