OIL PRICES 2020: $50 - $60
OGJ - Based on a "lower-for-longer" base-case scenario, global oil prices will remain in the $50-60/bbl range until late 2020, due to increasing supply that breaks even at $50/bbl, according to to the most recent global oil supply and demand outlook from McKinsey Energy Insights (MEI).
The outlook is driven by a mixture of negative—supporting lower prices—and positive—supporting price recovery—market fundamentals, which are expected to impact the speed of market rebalancing and price recovery, in the medium and long terms.
Global oil demand growth will gradually slow to 1 million b/d/year in 2017-21 driven by flattened global economic growth, improved energy efficiency, and electric vehicle substitution.
MEI projects the global gross domestic product growth will slow to 2.4-2.7%/year through 2030. Oil intensity, measured by million barrels per day over GDP, will be 40% lower in 2030 compared with the level in 2000. Particularly, annualized liquids demand growth will be 400,000 b/d during 2025-30 compared with 1.2 million b/d during 2015-20.
On the supply side, MEI notes that average production costs have been dramatically reduced, thanks to lower labor costs, a stronger US dollar, decreased operation services, and less maintenance. MEI believes that the recent improvements in project costs are expected to be partially maintained, with production costs in 2030 to be 15-20% less than the costs in 2014.
In terms of production outside of the Organization of Petroleum Exporting Countries, decline rates have visibly accelerated in onshore conventional fields resulting in a 1 million b/d/year rise in production to 2021. Also, new resource types decline faster than onshore conventional fields. This results in an acceleration of average annual declines.
"The industry needs to replace 3-4 million b/d production every year due to declining production in mature basins," MEI said.
OPEC reached full level of compliance with the November production-cut deal. However, production growth in deal-exempt countries and natural gas liquids offset a large part of the cuts. MEI expects that, following historical patterns, OPEC will adhere to production cuts and then ramp up production when markets tighten again.
According to MEI, US shale oil output will keep rising despite low prices, reaching 6.6 million b/d by 2021 and 8 million b/d by 2025 because of improved breakevens and capital availability. Growth will be mostly driven by drilling in the Permian basin. Depending on oil price scenarios, production can vary by 5.5 million b/d.
However, after peak in 2026, MEI sees US shale oil production declining because of resource constraints in the Bakken and Eagle Ford areas.
In general, production from projects reaching final investment decision after 2014 is not enough to fill the supply gap, global oil markets will be tightened by 2020-21, according to MEI.
The firm also forecasts that it will take 2-3 years for stocks to go back to 5-year average levels given the current overhang.
In the long term, 2020-30, MEI estimates that exploration and production companies will need to add 35 million b/d of crude production from unsanctioned projects by 2030 to meet demand. Under these circumstances, 2025-30 marginal costs are projected to reach $60-70/bbl.
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