Outlook for Global Oil Markets
Opening address by HE Abdalla S. El-Badri, OPEC Secretary General, at the Chatham House Conference: Middle East and North Africa Energy 2016, Theme: "Power, Security and Energy Markets", Overview: Energy Markets, Political Developments and Security Challenges, 25 January 2016, London, U.K
Your Excellencies, ladies and gentlemen,
I am happy to be speaking again at Chatham House’s ‘MENA Energy’ conference. It is always a pleasure to be here.
This morning I have been asked initially to share my thoughts on the outlook for the global oil market. Given events in the oil market over the past 18 months or so, there is clearly much to discuss.
To put it simply: the market is currently going through a significant readjustment. Since July 2014, prices have fallen by more than 70 per cent, many investments have been deferred and some cancelled, manpower has been laid off, supply has been greater than demand, stocks have risen above their five-year average, and the market has been searching for balance.
The pain of this readjustment is being felt across the industry. These are tough times. But we should also remember that ‘tough times’ are nothing new for the industry. It has been here before. The story of our industry is one of many cycles, both up and down.
We have had periods when prices were low, and periods when prices were high. We have seen times when supply outstripped demand, and times when supply has struggled to keep up. There have been long periods of stability, as well as periods of instability.
Of course, every situation is different, and in this current cycle it is important to ask the questions: how did we get here, and how might we get out?
It is well documented that the cycle on this occasion has been supply-driven, with most of the supply increases in recent years coming from high-cost production. Until 2015, all of the supply growth since 2008 has come from non-OPEC countries. Between 2008 and 2014, overall non-OPEC growth was more than 6 million barrels a day, while OPEC actually saw a contraction.
In fact, in 2013 and 2014, OPEC supply fell by more than 1 million barrels a day and non-OPEC grew by 3.7 million barrels a day. To put this in some context, global demand growth over these two years was 2.3 million barrels a day.
In 2015, this dynamic changed as expansion was seen from both non-OPEC and OPEC. Non-OPEC grew by slightly over 1.2 million barrels a day, and OPEC at around 1 million barrels a day.
These numbers are important when we look at the growth in OECD commercial stocks. As this graph highlights, the five-year average was at its lowest level at the end of 2013. Since then the five-year average has risen dramatically, from a negative level of 85 million barrels to a surplus of more than 260 million barrels at the end of 2015. There is no doubt this has strongly impacted crude prices.
Moreover, for the same period there has also been a rise in non-OECD inventories, plus an expansion in some non-OECD strategic petroleum reserves.
It is vital the market addresses the issue of the stock overhang. As you can see from previous cycles, once this overhang starts falling then prices start to rise.
Given how this developed, it should be viewed as something OPEC and non-OPEC tackle together. Yes, OPEC provided some of the additional supply last year, but the majority of this has come from Non-OPEC countries.
It is crucial that all major producers sit down to come up with a solution to this. The market needs to see inventories come down to levels that allow prices to recover and investments to return.
This is not only crucial for producers, but consumers too. The world desires more oil, and this means more investment.
OPEC sees oil demand increasing by around 17 million barrels a day between now and 2040, reaching close to 110 million barrels a day by then. And in terms of oil-related investment requirements, these are estimated to be around $10 trillion over this period.
However, the current environment is putting this future at risk. At current price levels, it is clear that not all of the necessary future investment is viable.
New barrels are needed not only to increase production, but to accommodate for decline rates from existing fields.
We need to remember that low oil prices are bad for producers today and lead to situations that are bad for consumers tomorrow. And high oil prices are bad for consumers today and lead to situations that are bad for producers tomorrow.
Thus, as I have often said, extreme prices – either too high or too low – are not in the interests of either producers or consumers.
Of course, there are also many other ongoing and related challenges for oil markets, such as: the uncertain prospects for the global economy; excessive speculation and the role of financial markets; the impact of geopolitics; advances in technology and their impacts on exploration and production; and environmental concerns.
Before I finish, I would like to touch briefly on the environmental challenge, following December’s ‘Paris Agreement’ to reduce climate change.
We welcome the agreement. The challenges related to the environment and climate change are a concern for us all. We all live in the same world. In this regard, we need to be practical, realistic and equitable.
Yes, we need to continue to develop renewables. But they cannot be seen as a replacement for fossil fuels in the coming decades. Combined, oil and gas are still expected to supply over 50 per cent of the global energy mix by 2040.
Yes, we need to continue to use energy more efficiently. But we need to remember that some people still have no access to modern energy services.
Yes, there are environmental concerns regarding fossil fuels. But there are ways that these can be met and overcome. We need to look at all the options available to us.
Your Excellencies, ladies and gentlemen,
It is important to recall that the previous high oil-price cycle was the outcome of a lack of investment in more supply. And the low oil-price environment we find ourselves in today is the result of too much investment in high-cost production during that previous period.
It underscores that the best way forward is for all industry stakeholders to continually work towards achieving more balance for our industry. Not only in the short-term, but in the long-term as well. This will help us deliver a sustainable energy future; for all producers and for all consumers too.
There is no doubt that the industry will come through this current cycle. Market forces, as well as cooperation among producers, will eventually lead to the return of stability.
We already see some signs that supply and demand fundamentals will start to correct themselves in 2016. Global oil demand growth this year is expected to increase by around 1.3 million barrels a day, and non-OPEC oil supply is anticipated to contract by around 660,000 barrels a day.
But as I have already highlighted, we need to see the stock overhang reduced too. This is now central to the return of a balanced market.
Tough times require tough choices. I know the industry can make these. It has in the past, and I am sure it will do this time. It is why I remain optimistic about the industry’s future.
Thank you for your attention.