Medium-Term Oil Market Report 2016 - Summary

Attempting to understand how the oil market will look during the next five years is today a task of enormous complexity.

Some certainties that have guided our past outlooks are now not so certain at all: that oil prices falling to twelve-year lows will lead to a strong demand growth spurt; that oil prices falling to twelve-year lows will lead to a mass shut-in of so-called high cost oil production; and not least that oil prices falling to twelve-year lows will force the largest group of producing countries to cut output to stabilise oil prices.

For some time now analysts have tried to understand when the oil market will return to balance. A year ago it was widely believed that this would happen by the end of 2015 but that view has proved to be very wide of the mark.

In 2014 and again in 2015 supply exceeded demand by massive margins, 0.9 mb/d and 2 mb/d respectively, and for 2016 we expect a further build of 1.1 mb/d. Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices when the market, having balanced, then starts to draw down those stocks.

Unless we see an even larger than expected fall in non-OPEC oil production in 2016 and/or a major demand growth spurt it is hard to see oil prices recovering significantly in the short term from the low levels prevailing at the time of publication of this report.

It is very tempting, but also very dangerous, to declare that we are in a new era of lower oil prices. But at the risk of tempting fate, we must say that today’s oil market conditions do not suggest that prices can recover sharply in the immediate future - unless, of course, there is a major geopolitical event.

Further, it is becoming even more obvious that the prevailing wisdom of just a few years ago that “peak oil supply” would cause oil prices to rise relentlessly as output struggled to keep pace with ever-rising demand was wrong.

Today we are seeing not just an abundance of resources in the ground but also tremendous technical innovation that enables companies to bring oil to the market.

Added to this is a remorseless downward pressure on costs and, although we are currently seeing major cutbacks in oil investments, there is no doubt that many projects currently on hold will be re-evaluated and will see the light of day at lower costs than were thought possible just a few years ago.

The world of peak oil supply has been turned on its head, due to structural changes in the economies of key developing countries and major efforts to improve energy efficiency everywhere.