Oil supply shortage – inevitable?

US, WASHINGTON (ORDO NEWS) — Oil prices are rising as supply cuts are growing stronger and a tipping point is set in the situation with oil demand. Some oil market analysts have warned that supply shortages may soon emerge, which will intensify in the coming years due to the damage done today.

Demand is still falling, but many believe that the lowest levels were achieved in April, even if consumption was low for a few more months. A number of European countries, along with some US states, are softening quarantine measures. “There are still doubts about production trends, but amid growing economic optimism, the market is already convinced that demand and prices will recover quickly,” writes Commerzbank.

The reduction in supply will be serious. “The current activity levels of US shale oil production are so low that the decline will be rapid,” writes Standard Chartered. The bank expects that by the end of the year, production of shale companies will fall by 2.74 million barrels per day.

But the losses will be not only in the shale oil sector. Conventional production around the world, which forms the bulk of the global supply, will also suffer from low prices and shutdowns of production and maintenance.

A sharp decline in global oil production could set the stage for the next renewal cycle. “The decline in activity and the gradual normalization of demand should lead to a more favorable situation in 2021,” Goldman Sachs writes. The investment bank expects that by the end of next year, oil prices will reach $ 65 per barrel.

In addition, some analysts expect an even greater discrepancy between supply and demand. “The world is facing the largest oversupply ever recorded in the oil market, but the numbers will change dramatically in the coming years,” the Rystad Energy report said. “The lack of activity and investment that is currently planned by exploration and production firms, coupled with the inevitable recovery of global oil demand, will lead to a supply deficit of about 5 million barrels per day in 2025.”

Rystad says that by 2025, Brent will rise to about $ 68 a barrel, but possibly higher because of the prospect of a supply shortage.

However, the possibility of such a shortage of supply depends on a recovery in demand. Rystad says the base case for oil demand is an increase of up to 105 million barrels per day by 2025, which will require an increase of another 5 million barrels per day over the next 5 years.

There are many reasons why the situation may be too optimistic. Given the recession and possible depression, it will take time to restore what has been lost over the past few months. Even if governments save a devastated economy, the scars from losses in the aviation and transportation segments, as well as an increase in the volume of remote work, will hinder the growth of oil demand. And taking into account the constant progress with regard to electric vehicles, we get a toxic cocktail for the growth of oil demand.

Even some oil company executives are beginning to fear peak demand. “We see a large decline in demand, which is unknown when it will recover. So the price of oil can recover. But with significantly lower volumes, we will have serious problems with our own cash, ”said Van Burden, CEO of Royal Dutch Shell.

But Rystad Energy is not the only one who expects supply shortages and sharp price recovery. Standard Chartered notes a flat futures curve. “The market underestimates the degree of damage to the offer,” Standard Chartered said. The bank said prices should rise in the long run. So there will be an opportunity to fill the supply gap.


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