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Tuesday, November 20, 2018

Tight oil supply – high oil price – eventually dampening demand

The CEO of TOTAL, Christophe de Margerie, has just warned that the world's capacity to produce oil is not as great as the official prognoses indicate. The long-term prognosis of the Paris-based International Energy Agency (IEA) foresees that oil consumption will increase to 116 million barrels per day (mbd) by 2030, up from about 85 mbd today. The Energy Information Administration (EIA), which gives official energy statistics from the U.S. government, foresees a similar increase to 118 mbd in 2030.


De Margerie says that an optimistic prognosis is 100 mbd and that tight supply will probably sustain the high oil price. This was over 96 dollars per barrel on 31 October 2007, which was a new record both in real and nominal terms. He says that it is not a lack of reserves that is causing the price to spike, but the capacity to develop these reserves. The world has also not understood that oil rich countries will want to keep some of their reserves for the future. In several countries such as Iraq, Nigeria, and Venezuela, the supply is also being limited due to security issues and politics.


Assuming an increase to 100 mbd in 2030, this is only an increase of 15 mbd or an average yearly increase of just under 0.7 mbd or 0.7%. By comparison, the IEA prognosis for the increase in demand in 2007/08 is 1.2/2.1 mbd. If Total's De Margerie is right, and if the supply of oil might actually be even less than his optimistic prognosis – or might even actually decline - it may have a severe impact on the tanker market in the coming years.


As it looks now, U.S. oil imports are more than 1% below their 2006 level, but stocks are some 10 VLCC-loads lower than they were at the same time last year. Japanese and European oil imports appear to be on the way down, although the records are not as up to date as for the U.S. and are somewhat more uncertain. The Chinese locomotive on its own will not be able to keep up the demand for tankers - in China they have also recently increased the petrol price to try and dampen demand.


The world economy is far less dependent on oil than in the 1980s, the last time the oil price peaked, but a doubling of the price since 2004 is likely to stimulate both the alternative use of energy and energy saving. At the same time there is pressure to reduce the burning of fossil fuels for environmental reasons. A third issue is the high priority of energy security. If it is correct that production capacity is tight, then prices will remain high and dampen demand.


If we make an assumption of a 2.5% increase in oil transportation over the next years and if we assume a balanced market at the end of 2006, we will, with the current orderbook and without any further orders, build up a surplus that will last beyond 2015 (see graph below). Ordering is unlikely to stop completely and new orders will mean that the surplus will continue, unless relatively new double hull tankers are sold for decommissioning - which is unlikely. The tanker market is therefore completely dependent on stronger demand or on special events in order not to risk severe downward pressures.



Contact: Erik Ranheim