“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the International Energy Agency said in its annual Medium-Term Oil Market Report released Tuesday. This shift is expected to not only prompt oil companies to adjust their global investment strategies, but also reconfigure the way oil is transported, stored, and refined.
Although geopolitical risks are numerous, market fundamentals indicate that this surge in oil production will create a more comfortable balance between global oil supply and demand in the next five years. The MTOMR estimated that the North American supply will grow by 3.9 million barrels per day from 2012 to 2018, a figure equivalent to nearly two-thirds of the total 6 million barrels per day growth forecast for countries not part of the Organization of the Petroleum Exporting Countries. In addition, world liquid production capacity is estimated to grow by 8.4 million barrels per day — a pace significantly faster than that of demand — which is projected to expand by 6.9 million barrels per day.
As the Paris-based energy watchdog noted, continued growth in the supply of North American-produced crude oil “will cascade” through the global oil market.
Change is underway in oil demand as well as in oil production. In nearly every other facet of the market, developing economies drive growth, but in this quarter, for the first time, economies not part of the Organisation for Economic Co-operation and Development — which includes countries from Australia to Chile to Iceland to Turkey — will overtake OECD nations in oil demand. Not only that, but massive refinery capacity in non-OECD economies has begun to accelerate a restructuring of the global refinery industry and oil trading. Refiners in Europe will face a tough market due to increasing product exports for the United States and new Middle Eastern refiners.
“North America has set off a supply shock that is sending ripples throughout the world,” said IEA Executive Director Maria van der Hoeven, who discussed the report at the Platts Crude Oil Summit in London. “The good news is that this is helping to ease a market that was relatively tight for several years. The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves. But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”
The new technologies that are responsible for the oil boom are expected to increase production from mature, conventional fields — which, in turn, will cause oil producers to reconsider investments in other high-risk areas. However, the growth in North American oil production has created challenges as well as opportunities. With crude imports to this region tapering off and excess refining output from the United States in need of markets, the “domino effects” from this new supply will continue. While this increased production did help offset supply disruptions in 2012, if North American supply is to continue to compensate for declines and delays elsewhere, necessary infrastructure will be needed. A failure in that area would cause a bottleneck that could pressure prices lower and slow development.
Still, OPEC oil will remain a key part of the oil mix, according to the IEA, but production will most likely be adversely affected by increasing insecurity in North and Sub-Saharan Africa. The organization’s capacity has been forecast to gain 1.75 million barrels per day this year, reaching a level of 36.75 barrels per day, which is about 750 thousand barrels per day less than predicted in the 2012 MTOMR.
This shift to non-OECD produced oil will transform the global product supply chain by exerting downward pressure on refining margins and utilization rates, the Energy Agency noted. As new refining centers extend their reach, product supply chains will lengthen, resulting in higher disruption risks and potentially more volatile markets in product-importing economies.
Here’s how the market traded on Tuesday:
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