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2016-02-09 18:40:00

OIL MARKET BALANCE

OIL MARKET BALANCE

The oil market is in a state of flux.

Oil prices are close to a quarter of their level 18 months ago. Over the past two years, the supply of oil has grown at its strongest rate for more than a decade, fuelled by the US shale revolution. China, the world's most important growth market for oil, is in the throes of a fundamental rebalancing of its economy. And the commitments made at the COP21 climate change meetings in Paris have raised a question mark over the long-term prospects of all fossil fuels.

Not surprisingly, much of the current attention is focused on the near-term prospects for oil. Just how low will oil prices fall and for how long?

On that question, there are clear signs that the oil market — just like any other market — is responding to the prompt of lower prices. Global oil demand in 2015 increased by more than twice its 10-year average and looks set to grow strongly again this year. And supply is beginning to wilt: US shale production is already well off its peak levels of last spring and is likely to continue to fall through much of this year.

Based on those trends, and even with the prospective increase in Iranian production, the oil market is likely to move closer into balance by the latter part of this year. That will still leave a significant inventory overhang that will take some time to work off. But it seems likely that the market will show at least some signs of turning by the end of this year.

The more fundamental question, however, is to look beyond the here and now and consider what the current turmoil may tell us about the future for oil, and energy more generally, over the next 10 or 20 years. That is what really matters for energy companies undertaking long-term investments; for governments whose economies are reliant on exports or imports of energy; and for all of us worried about rising carbon emissions.

Although uncertain, three themes look set to characterise the evolving energy landscape over the next 20 years.

First, the global demand for energy is likely to increase markedly. As the world economy expands, driven by the fast growing economies of Asia, more energy will be needed to fuel the higher levels of activity and living standards. Exactly how much additional energy will be required will depend on the strength of global growth and on the success of economies in improving the efficiency with which they use energy. Even so, it seems clear that significantly more energy will be required to enable the world to continue to grow and prosper.

Second, the form of that energy is likely to change substantially. The commitments made in Paris, supported by improving technology and falling costs, mean renewable energy is likely to grow rapidly. Those same forces should also support a golden age for natural gas. The prospects for oil are less robust, although the likely doubling in the number of vehicles on the planet over the next 20 years should ensure a growing market for oil. The main loser looks set to be coal, as its key customer, China, rebalances towards a more sustainable, and less carbon-fuelled, pattern of growth.

Coal's loss is the climate's gain, with the third theme being a significant slowing in the growth of carbon emissions relative to the previous 20 years. That break from the past reflects faster increases in energy efficiency as well as a shift towards lower-carbon fuels, both aided by the pledges made in Paris. But based on the current policy outlook, those improvements are unlikely to deliver the sharp fall in carbon emissions called for in Paris.

That prospective shortfall underlines the importance of carbon pricing, which provides incentives for both energy providers and consumers to play their role in ensuring that the world is able to continue to access the energy it needs to grow and prosper, but do so in a safe and sustainable manner.

ft.com

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Tags: OIL, PRICES, MARKET,

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