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GLOBAL CRUDE OIL PRICE FORECAST IN 2021

Nandini Consultancy Centre has conducted study on global crude oil price forecast in 2021.

The study has been conducted by a team of chemical business professionals, led by Mr.Swaminathan Venkataraman, Director, Nandini Consultancy Centre (S) Pte Ltd. Singapore.

Findings of the study is given below

Considering the various factors impacting the price, the rise in global crude oil price between 2018 and 2021 is inevitable.

Price fluctuation

The global price of crude oil has risen sharply in recent weeks.
The average price of crude oil (Brent, WTI and Dubai), which was as high as USD 105.08 per barrel in 2013 fell to around USD 50.75 per barrel in 2015 and then further down to USD 42.81 per barrel in 2016 but has since then shown rising trend.

Past price trends

 Price in USD / barrel

Period Average Brent Dubai WTI
2012 105.01 111.97 108.90 94.16
2013 104.08 108.86 105.43 97.94
2014 96.24 98.94 96.66 93.11
2015 50.75 52.37 51.18 48.71
2016 42.81 44.05 41.20 43.19
2017 Q1 54.12 52.90 51.83 52.95
2017 Q2 50.25 49.73 48.24 49.41
2017 Q3 51.74 50.64 48.17 50.18

 

Source: World Bank Commodity price statistics

Brent price in Q4-2017

Period Price (in USD / barrel
Oct-2017 57.51
Nov-2017 62.4
1st week – Dec 2017 63.73

Falling exploration efforts

Oil production is a capital intensive industry that requires management of existing production assets and evaluation of prospective projects, often requiring years of high investment on exploration, appraisal, and development before reserves are developed and produced.

The big oil fields that were discovered decades ago would inevitably begin to deplete. This means that new oil fields have to be discovered to sustain the global oil production to meet the future needs.
The oil exploration companies in the world used to spend around USD 450 billion annually on exploration and development. New oil fields typically require 4 to 5 years to be developed before the first drop of oil is produced.

The big conventional oil fields that have not yet been tapped tend to be in inaccessible spots deep below the ocean, high in the Arctic or Antarctic or both.
Upstream costs of developing new oil wells are increasing due to rising rig rates, deeper water depths and costs of seismic technology.

Several global oil and gas exploration projects have been slowed down and some have been put on hold in recent times, due to low price of the oil and consequent poor economics of oil exploration business.
Royal Dutch Shell ended its nine-year effort to explore for oil in the Alaskan Arctic, which was a USD 7 billion investment. This is a sign that the global oil exploration industry has reduced the oil exploration efforts in the wake of the low crude oil price.

Due to the fall in oil prices, the global investment in production and exploration fell from USD 700 billion in 2014 to USD 550 billion in 2015 and the trend continues.

Global oil discoveries fell to a record low in 2016 / 2017, as companies continued to cut spending on new oil exploration efforts and conventional oil projects sanctioned were at the lowest level in more than 70 years.
As a result of steady fall in crude oil price, oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years.
Falling oil production

In 2016, mature fields across the world, which constitute around one-third of global oil supply recorded total output drop by 5.7 percent, the steepest decline since 1992.
In 2017, the decline is expected to be around 5 to 6 percent.

Production from mature conventional oil fields in China dropped by around 9 to 9.5 percent in 2016
In the U.S. conventional oil fields production dropped by 11 percent in 2015 and the trend is continuing.

Oil production in Europe – concentrated in the offshore waters of the UK and Norway has fallen sharply.

UK production in 2016 was just under 48 million tonne, compared to a peak of 137 million metric tonne in 1999. Norwegian output peaked with almost 163 million metric tonne in 2001. Last year, it stood at around 90 million tonne.

Shale oil output in USA

Shale oil production complements the production of crude oil in the world.
US Energy Information Administration has revealed that oil production in USA increased 3% in September 2017 to nearly 9.5 million barrel per day, which indicates a consistent rise in the recent period.

Nearly all of the increases in US oil production are from shale, which in total accounts for nearly two thirds of the nation’s existing oil output.

The US shale industry has lowered its costs to such an extent that in many cases, it is now more competitive than conventional projects.

Impact on oil price due to inventories

Oil producers and consumers build storage capacity to store crude oil for immediate future needs. They also build some inventories to speculate on the price expectations and sale/arbitrage opportunities in case of any unexpected changes in supply and demand equations. Any change in these inventory levels trigger volatility in the crude oil prices which, in turn, create ripples in the spot market.

Global oil inventories generally nearly balance supply and demand. If production exceeds demand, excess supplies can be stored. When demand exceeds production, inventories can be tapped to meet the incremental demand.

The relationship between oil prices and oil inventories allows for corrections in either direction. If an inventory build is noticed, spot oil prices are likely to drop to balance demand with supply. Conversely, if oil futures rise in relation to the current spot price for oil, the impetus to store oil will increase.

Impact on oil price due to speculative activities

Speculation is the act of purchasing something with the anticipation of selling it
at a higher price at a later date.

Traders buy a contract for oil to be delivered at a later date (a futures contract), sell the contract before the oil is due for delivery and use the proceeds to purchase another futures contract for delivery at a more distant date. Expectations that the price of oil will be higher in the future motivate investment funds to take positions in these contracts and as demand for futures contracts increases, so does their price, which moves the current oil price.

The futures market guides investment by reflecting investors’ collective judgments about the trajectory of prices.

Speculative demand can materially contribute to the increase in oil prices.

Possible impact on crude oil price due to spread of electric vehicles (EV)

Globally, in 2015, cars accounted for 19 million barrel per day of liquid fuel demand, which constitutes a fifth of global demand. All else being equal, a doubling in the demand for car travel over the coming 20 years would lead to a doubling in the liquid fuel demand from cars.

However, improvements in fuel efficiency may reduce this potential growth in fuel consumption, since manufacturers will have to adopt stricter vehicle emission standards, in view of the statutory regulations.

Growth of oil consumption could decrease in future, as a growing number of countries take steps to give up liquid fuel driven cars and replace them by electric vehicles.

Number of electric cars are expected to rise significantly from 1.2 million in 2015 to around 100 million by 2035 (~6% of the global fleet). Around one fourth of these electric vehicles (EVs) are plug-in hybrids (PHEVs), which run on a mix of electric power and oil, and three-quarters are pure battery electric vehicles (BEVs).

However, the impact of electric vehicles on the global oil consumption by 2021 is unlikely to be significant, since introduction of electric vehicles on road have commenced only recently.

Decision to cut crude oil output by OPEC
OPEC and non-OPEC producers led by Russia have agreed to extend oil output cuts until the end of 2018 in an effort to clear global glut of crude.

Under the producers’ current deal, participating countries in the deal are cutting supply by about 1.8 million barrels per day in an effort to boost oil prices

OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million barrels per day. Both countries have been exempt from cuts due to unrest and lower-than-normal production.

What expectations of OPEC members?

OPEC and Russia together produce more than 40% of global oil. Russia’s first real cooperation with OPEC has been crucial in the reduction of global oil stocks.

OPEC has decided to extend the cuts in crude oil production up to end 2018, possibly due to its confidence that US shale producers will never be able to match its clout, especially with the global demand for oil currently growing by around 1.2 million barrels per day.

However, with oil prices rising above USD 60 per barrel, it is reported that Russia has expressed concerns that an extension of crude oil output cut for the whole of 2018 could prompt a spike in crude production in the United States.

Expectation of the International Energy Agency

With global demand for crude oil expected to increase by 1.2 million barrel per day a year in the next five years, the International Energy Agency (IEA) has repeatedly warned that an extended period of sharply lower oil investment in exploration efforts could lead to a tightening in supplies and consequent increase in price.

Likely oil scenario during 2018 to 2021

Crude oil prices are likely to rise in 2018 and will remain volatile in the next few years because of the ongoing structural changes such as the following
• OPEC and Russia’s decision to cut oil supply (1.8 million barrel per day) until 2018 end.

• Possible increased shale oil supply from USA that may replace any cut in the crude oil production by OPEC countries.

• However, one has to keep the fingers crossed with regard to the level of impact of shale oil production from USA on the global oil supply in future. To what extent the shale oil production can be increased in USA is a debatable question.

This would be so, since the life of shale well is not long and the adverse ecological impact of the shale wells are hotly debated in USA now. There may be considerable resistance from the public to expand the shale well operation to new regions in USA.

• Because of the shale oil supply from USA, inventory stocks have been built in the recent past and that has resulted in the global oil glut to some extent. This will play a larger role than in the past in influencing the global price in 2018.
In all probability, the global oil price would be influenced during 2018 to 2021 due to the following factors.
• Steady increase in global demand

• Slowing global oil and gas exploration efforts and rising cost of new exploration efforts, which will adversely impact any increase in oil production in future.

• Political developments in Middle East region and conflict of interests between the oil producing countries in the Middle East region.

• Shale oil supply prospects from USA

• The oil consumption due to introduction of electric vehicles would go down significantly, only if the power for recharging batteries of the electric vehicles is from non oil based energy source.

Volatility in the price may happen from time to time due to the inventory buildup and speculative market.
Considering the various factors discussed above and accounting for the possible volatility in price, the following price forecast is made.

Global crude oil price forecast – Period 2018

In 2018, the global inventory is likely to come down as a result of cut in oil production by OPEC and some non-OPEC countries.

While shale oil production would be stepped up in USA, it may not entirely replace the cut in oil production by OPEC countries which will considerably reduce the level of inventories from the 2017 level.

Further, demand will continue to rise. It is expected that the price will increase in 2018.
Forecasted average price in 2018: 66 USD per barrel

Global crude oil price forecast – Period 2019 to 2021

OPEC and non-OPEC countries are likely to increase the production from the existing wells. Shale oil production in USA will also marginally go up during the period.

While the global demand will increase at 1.2 million barrel per day, production of oil from new wells are unlikely to happen in significant measure, as the new oil exploration efforts have drastically slowed down. There is also possibility of production from existing wells marginally going down due to ageing.

Therefore, the additional production from the existing wells may just meet the increasing demand that would result in tightness in supply.

Forecasted average price

(in USD per barrel)

Period 2019 2020 2021
Crude oil price forecast 68.1 70.3 72.4

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