The International Energy Agency (IEA) has toned down previous estimates of the impact of North American shale fields on oil prices, suggesting oil will rise steadily to $145 per barrel (pb) by 2035.
The 2012 World Economic Outlook’s central policy scenario produced a price of $125pb in constant dollars by 2035. Earlier this year the agency estimated that US oil production had grown 50% since 2008.
In its annual long-term World Energy Outlook – considered the gold standard of energy analysis – the IEA said the price in current US dollars would remain at the upper end of its recent range, as new, unconventional oil supply was balanced by lower Middle Eastern exploration and higher demand.
While new sources of supply lowered short-term price projections, higher input costs, Asian growth and a slowdown in Saudi Arabian development would contribute to a price of $120pb by 2020, $127pb by 2025, and $136pb by 2030, under its current central policy scenario, said the IEA.
‘Technology and high prices are opening up new oil resources, but this does not mean the world is on the verge of an era of oil abundance,’ said IEA chief economist Fatih Birol.
While the headline price of oil would remain elevated, the IEA added that the changing profile of production would accelerate and deepen current regional energy price disparities, with a major impact across the global economy and supply chain.
It said the US would become the largest oil producer in the world by 2015 and be become self-sufficient by 2030.
While that would have a limited impact on global prices, the country would reap huge competitive benefits from other areas of energy policy, primarily in gas-fuelled manufacturing.
Less efficient distribution and less transparent pricing mean gas pricing disparities would continue and deepen, it said. US wholesale prices are currently one third of the price in Europe and one fifth of the price in Japan.
‘The US [will see] its share of global exports of energy-intensive goods slightly increase to 2035, providing the clearest indication of the link between relatively low energy prices and the industrial outlook,’ said Birol.
‘By contrast, the European Union and Japan see their share of global exports decline – a combined loss of around one third of their current share.’
The correlation between the Europe-focused Brent oil price index and the North American West Texas Intermediate has broken down in recent years and despite a slight uptick since the Syrian crisis, has collapsed this year.
Versus a 20-year average correlation of 0.99, the correlation between the two has more recently stood at 0.09.
While there are a range of factors feeding into that, such as pipeline closures and structural changes in the refining industry, combined with the gulf which now exists between global gas prices, this strongly suggests that increased ‘unconventional’ oil extraction is having a big impact.
Angelos Damaskos, chief executive of Sector Investment Managers and adviser to the company’s Junior Oils Trust, said recent price action had reflected a risk premium and fundamental supply remained more limited than long-term projected demand.
‘Production from [non-Gulf] Opec members has dropped significantly due to political and social unrest,’ said Damaskos.
‘The IEA asserted that “the Middle East is and will remain the heart of the global oil industry for some time to come” when reporting that US crude production has increased by 50% since 2008.
‘The increased supply appears to have been met by growing demand from China, which this year became the largest net importer of oil in the world. In our view, it is likely that oil prices will continue the longer-term rising trend as demand outstrips new supply.’