The global crude oil glut ― driven principally by the dueling spigots of U.S. tight oil producers and those of Organization of the Petroleum Exporting Countries ― has diminished somewhat. However, stockpiles in the U.S., which consumes more crude oil than any other country, remain well above the five-year range. In addition, inventories of products such as gasoline stand at multi-seasonal highs, with the likelihood of a pullback in throughput by refiners. Concerns about weak fundamentals saw money managers and speculators, in the week to July 26, holding a record (dating back to 2006) net-short position on NYMEX-traded gasoline, Reuters reports.

While money managers and other investors also reduced their net-long positions on NYMEX West Texas Intermediate crude to a near five-month low, some independents are betting on a crude oil spike in the mid-term; and there may be justification for that.

Oil Prices

Front month September contracts for the international benchmarks Brent and West Texas Intermediate (WTI) settled at US$42.46/bbl and US$41.60/bbl respectively, 29 July. That settlement price for Brent was down 14.5% for the month, the largest monthly drop in about six months; for WTI the price was down 14% for the month, the largest in about twelve months.

The low price regime is driven in the main, by a massive inventory of crude oil and refined products, as well as a sluggish demand. According to data from International Energy Agency, IEA, global crude oil demand declined by 510,000 barrels per day (bpd) between 3Q 2015 and 1Q 2016. Many industry analysts have projected a market re-balancing in 2017, but any oil price rebound is likely to be sluggish.

In view of the dour outlook for the global economy, it is unlikely the demand profile will improve very significantly in the near term. According to the International Monetary Fund,

The global outlook for 2016-17 has worsened, despite the better-than-expected performance in early 2016. This deterioration reflects the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front. This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally.

A low oil price regime, especially when protracted, is a disincentive to investment in finding and development of oil resources; and the inadequacy of oil supply would conduce to a price spike, in the absence of an alternative resource.

Development Projects

In January, the consulting firm Wood Mackenzie reported that sixty-eight major oil and gas projects worth US$380 billion have been delayed to the next decade, due to the oil price slump. The development projects accounted for 27 billion barrels of oil equivalent (boe) and 2.9 million bpd of production. There have been even more delays and cancellations of projects since.

In a more recent report, the consulting firm indicated that a little above 20 million bpd of oil would be required over the next decade to meet global demand. It added that about 13 million bpd of those would be met by current development projects, mostly U.S. tight oil plays.

The race is then to secure the balance of about 10 million bpd; but with two consecutive years ― and probably a third in 2017 ― of significant capital expenditure cutbacks, that race may be a challenging one.

Among oil-producing companies, the majors are most equipped in terms of financial muscle to execute large-scale so-called “mega projects”, however their record of project delivery with regard to time and budget constraints is dismal. Some of the companies recently reported significant earnings declines. Second quarter profits at BP (44%), ExxonMobil (59%) and Shell (72%) fell substantially. Low oil prices and poor refining margins were a double whammy to their operations. With many Exploration and Production companies paying more attention to dividends and cash flow, longer-term output capacities may be affected.

The Middle East has been least affected by the spate of project delays and cancellations. However, only Saudi Arabia currently holds any significant spare supply capacity. Iran has been ramping up output and needs to resolve technical issues in order to maintain supply in the longer term. In Iraq, the current price regime has served to curtail the previously spiking output. Kuwait would need to address some hurdles to exploit her good output growth potential.

Africa’s Atlantic petroleum province ― which ranges from Angola through Nigeria and Ghana to Senegal and Guinea including pre-salt formations ― holds great supply potential; however, there are issues with the largest plays. In Nigeria, Africa’s largest producer until last year for example, unrest in the prolific Niger Delta region has sent output to multi-year lows while uncertainty about the country’s sectorial policy thrust has seen a rash of divestments as well as project deferrals.

In Europe and Eurasia, the U.K. North Sea in the main, has fallen into declining productivity and with its high production cost, the low price regime will only hasten retirement of mature fields. Russia holds new output potential but technical issues arising from European Union and U.S. sanctions would see much of any growth offsetting decline in mature fields. The recently-announced Tengiz expansion project in Kazakhstan, a partnership involving Chevron Corp, ExxonMobil Corp, KuzManayGas and Lukoil, is expected to deliver about 260,000 bpd of oil in 2022.

In the Americas, U.S. output has been declining rapidly; and the decline is projected to continue well into 2017, in spite of production high-grading in shale plays. Production has fallen by 1.1 million barrels per day (MMbpd) since 2015, Energy Information Administration reports. In Canada’s oil patch, no new project is planned before 2020, according to the Spring edition of Oil Sands Quarterly.

Latin America has seen a very high idling rate for drilling operations. However, Brazil’s output from its pre-salt formations could almost double to nearly 2 million bpd within the next four years, but socio-political turmoil and corporate governance issues could constitute a major hindrance.

All said, as the low oil price regime lingers, there is some concern that in the wake of project delays and cancellations, as well as retirement of ageing fields, insufficient volumes of oil are coming on-stream. The implication then is that there may be a shortfall in the volume of oil, which would be necessary to meet demand in the medium term; and that would most likely lead to an oil price shock.