Continued Market Tightness Over the Medium Term: IEA

“Record prices in the oil market in recent months have become a threat to the global economy and social welfare of millions of people – some are calling it the third oil shock. While we have seen some weakening in demand in the OECD, supply constraints, refinery limitations and continued demand growth in key emerging markets will maintain pressure in the market over the medium term”, Nobuo Tanaka, Executive Director of the International Energy Agency (IEA) said in Madrid at the launch of the IEA Medium-Term Oil Market Report (MTOMR) in July. 

Speaking at a press conference at the World Petroleum Congress, Mr. Tanaka emphasized that market fundamentals were the main underlying factor behind high oil prices. “OPEC production is at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build. These factors demonstrate that it is mainly fundamentals pushing up the price,” he added.

The third issue of the IEA Medium-Term Oil Market Report analyses market developments to 2013, building on the short-term analysis of the monthly IEA Oil Market Report. The MTOMR offers a fresh appraisal of upstream and downstream projects worldwide, incorporating recent changes in demand dynamics. The report includes in-depth analyses of price formation, transport trends, non-OECD economies, non-OPEC production decline, project slippage, biofuels and a stronger emphasis on product supply bottlenecks. “We look closely at what investments are committed, which projects are underway, whether demand will continue to surge and where potential risks lie looking forward to 2013,” said Mr. Tanaka.

Supply

Supply growth deriving from a concentration of new project start-ups during 2008-2010, allied to weaker economic growth, sees potential spare capacity rise in excess of 4 mb/d. However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013. Since the 2007 MTOMR, significant downward revisions have been made to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady. “Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream -- to assure that the market is adequately supplied,” stated Mr. Tanaka.

Biofuels

Although biofuels will add to supply growth, increasing from 1.35 mb/d in 2008 to 1.95 mb/d by 2013, announced capacity additions may be difficult to achieve given available feedstock and growing concerns due to rising food prices. “Biofuels have helped to diversify energy supply. They cannot be blamed for all of the increase in grain prices, even if they have had an impact. However, we remain cautious in regard to the future growth of 1st generation biofuels as there will be growing competition for feedstocks and we see increased difficulties to expansion of biofuels in some places,” said Mr. Tanaka.

Demand

Global demand for oil products will grow by an average of 1.6% per year to 2013, from 86.9 mb/d in 2008 to 94.1 mb/d. Contrary to supply trends, demand growth will be weakest in the first two years of the period, building as global GDP growth strengthens from 2010 on. “We continue to see a significant shift in demand away from the OECD countries,” Mr. Tanaka noted. “Developing countries will drive demand growth, their total consumption equalling that of mature economies by 2015.” Asia, the Middle East and Latin America will account for nearly 90% of demand growth over the five-year forecast period.

Refining

An anticipated 8.8 mb/d of crude distillation capacity will be added to the refinery system by 2013. These additions should cover supply increases over this period and help ease current refinery tightness, which limits the flexibility of the industry to meet the structurally-strong demand growth for middle distillate fuel. A doubling of costs and longer lead times for delivery of key upgrading units have led to greater uncertainty over project plans in the refining sector. New capacity additions are primarily in China, Asia and the Middle East. Additional investment is expected in upgrading capacity and desulphurisation units.

“This medium-term analysis sheds light on where the oil market is headed over the next five years. The better we understand current trends, the more we can do to ensure we have adequate oil supply at affordable prices,” Mr. Tanaka said.