The balancing act: A look at oil market fundamentals over the next five years
Deloitte MarketPoint insights
The oil and gas industry is in turmoil. A downturn in crude oil markets has taken a bumpy path, resulting in declining oil prices and leading to deep CAPEX spending reductions. What, then, is the future of oil? Although sizeable capital and operational budget cuts could leave a lasting impact, Deloitte MarketPoint analysis delves into that future to provide beneficial insights. From the sources that cover production shortfalls to how current supply and demand could affect future oil prices, discover what the next five years of oil may look like by viewing our report.
Oil markets over the next five years
Since mid-2014, the crude oil markets cycle has turned downward, resulting in ever lower prices, leading to deep CAPEX spending reductions, and creating turmoil across the oil and gas industry. Recently, market prices had briefly slipped below $30/bbl. Some analysts are predicting even lower prices while others are arguing for a modest recovery—at least in the near term. The current downturn has been brought on by a variety of factors including, but not limited to, the US tight oil revolution, the Organization of Petroleum Exporting Countries’ (OPEC) new strategy led by Saudi Arabia to protect market share rather than balance the market, the lifting of sanctions on Iran, growing inventory levels of crude oil and refined products worldwide, and expectations of lower world oil demand growth due to a worldwide economic downturn.
In February 2015, Deloitte MarketPoint and the Deloitte Center for Energy Solutionsreleased “Oil prices in crisis,” an analysis of the then current oil markets. That paper considered the factors that led up to the collapse in oil prices. In this paper, Deloitte MarketPoint reviews recently released market data and examines changes in oil supply and demand in light of lower price expectations. We also discuss the net effect these could have on future oil prices over the next five years using our MarketBuilder World Oil Model and Reference Case.
In this report, we examine:
- The growing list of canceled development projects
- New production still expected to come online
- Increased Iranian production resulting from the lifting of sanctions
- Current and future demand outlooks
- A comparison of Deloitte MarketPoint’s Reference Case outlook to the forward curve
MarketPoint analysis of the future of oil
While current crude oil markets prices reflect a dire situation for much of the industry, sizeable capital and operating budget cuts over the last year are going to leave a lasting impact. Based on our analysis, we could see a supply shortfall of over 1 million b/d as early as 2018 based on canceled or delayed investments and factoring in investment carryovers and excess storage drawdowns. This shortfall should generate a much-needed price increase to around $58/bbl, but not the return of $100+/bbl oil in the near term.
Our analysis suggests sources such as the major US tight oil basins, Iran, Iraq, and possibly Russia could potentially cover the first two years of production shortfall at the $58/bbl price range. Beyond 2019, continued demand growth and production declines will require further price increases to cover full cycle costs for high-cost producers such as Canadian oil sands and deep water, off-shore sources.
The analysis in this paper represents only one of a vast number of possible scenarios for the future of oil. The exercise isn’t meant to predict future prices and flows but more to discuss the impact future fundamentals could have on prices. Deloitte MarketPoint advocates the development of numerous scenarios based on quantitative analysis to develop a range of potential outcomes that can help strategic planning teams develop robust business plans.
Meet the authors
George Given, Deloitte MarketPoint Advisory Leader, Deloitte MarketPoint LLC
Jeff Suchadoll, Senior Manager, Crude and Refined Products, Deloitte MarketPoint LLC