For many years, markets had focused on ‘peak oil’, whereby escalating costs of production as new oil deposits became harder to source and rising levels of depletion meant that an increasing amount of production would be needed each year to keep overall supply unchanged.
In the International Energy Agency’s (IEA) 2008 World Energy Outlook, it published for the first time a study of depletion rates in the top 800 global oil fields. It concluded that depletion rates had risen to 5.1% p.a. from 4.5% a few years previously and forecast that this would continue to rise over the coming decades.
This meant that the global oil market balance would naturally tighten every year by 4-5m b/d (million barrels per day) and the IEA report concluded that, “it is becoming increasingly apparent that the era of cheap oil is over”.
However, in the background, a technology, which was initially discovered in the mid 19th century, was already gaining traction: hydraulic fracturing. The US shale oil revolution crept up on markets in the following years and then rapidly accelerated from 1.2m b/d in 2010 to a peak of 5.36m b/d in March 2015.
Chart 1 US shale oil production
Saudi Arabia reacted to the shale oil revolution with a well-publicised strategy, increasing production into an already oversupplied market and driving oil prices sharply lower. This is a critical difference between the recent oil price slump and historical episodes, that this one is clearly supply-driven, rather than being caused by declining global demand. In fact, after dropping to 84.8m b/d in the 2009 financial crisis, demand is forecast to have increased by over 9m b/d by 2016 to a record 94.2m b/d.
Chart 2: World oil demand (m b/d)
Furthermore, demand growth is widespread and strongly responding to lower prices. For instance, in January 2015, OPEC expected 2015 global demand to grow 3.6%, or 1.15m b/d, but by the end of that year it increased the forecast to 1.53m b/d.
Its current forecast for 2016 is for an additional 1.3m b/d of demand, but with the IMF expecting global economic growth to accelerate in 2016 to 3.4% from 3.1% in 2015 and with oil prices at such low levels, that forecast could well once again prove conservative.
