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The IEA Takes Oil Bulls By The Horns
A recent report from the International Energy Agency (IEA) predicts a sluggish rebound for oil demand over the next few years, even in a bullish economic growth scenario. The IEA in its Medium-Term Oil Market Report estimates that demand for oil will not exceed the 2008 level of 85.76 million barrels per day until 2012, when it will reach 86.76 million barrels per day. The IEA estimates that demand will reach 89 million barrels per day by 2014. Obviously, this demand scenario is not bullish for oil prices in the medium term. Even worse for oil bulls is that this estimate assumes an economic recovery in the high end of the range. If the lower economic growth scenario is realized, then oil demand will actually contract to 84.9 million barrels per day by 2014.
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The Good News
One bit of good news in the report was that the IEA predicts that non-OPEC supply will decline by 400,000 barrels per day from 2008 to 2014. Under the lower growth scenario, non-OPEC supply would fall 900,000 barrels per day over the six-year period. This change is due to projects being delayed by major oil companies because of lower oil prices. Exxon Mobil (NYSE:XOM) is one that has not cut back exploration and production, and just announced that it would drill three deepwater exploratory wells off the coast of Libya.
Russian Decline
Russian production is estimated to decline by 500,000 barrels per day by 2014, due to the effects of high decline rates in its older fields, and the withering of foreign investment. This may explain the changing attitude of the Russian government toward large international oil companies. The Russian government just gave approval for a joint venture between a Russian Oil company and Total SA (NYSE:TOT) to develop a large natural gas field in the Arctic Ocean area. Russia also encouraged Royal Dutch Shell (NYSE:RDS.B) to participate in new leasing activity in the Sakhalin Island development, where blocks 3 and 4 need to be developed.
Iraqi Increase
Iraq is also beginning to open up its oil fields to foreign companies, with a who's who list of international oil companies lining up to bid. These include Conoco Phillips (NYSE:COP), Marathon Oil (NYSE:MRO), BP Inc. (NYSE:BP) and Chevron Corp (NYSE:CVX).
The Bottom Line
The IEA threw a dagger straight at the heart of oil bulls when it cut its medium term demand forecast for the next five years. However, if the old cliche "history repeats itself" has any validity, oil bulls will ignore this contradictory evidence and continue on. (To learn more, read our Oil And Gas Industry Primer.)
IN PICTURES: 20 Tools For Building Up Your Portfolio
The Good News
One bit of good news in the report was that the IEA predicts that non-OPEC supply will decline by 400,000 barrels per day from 2008 to 2014. Under the lower growth scenario, non-OPEC supply would fall 900,000 barrels per day over the six-year period. This change is due to projects being delayed by major oil companies because of lower oil prices. Exxon Mobil (NYSE:XOM) is one that has not cut back exploration and production, and just announced that it would drill three deepwater exploratory wells off the coast of Libya.
Russian production is estimated to decline by 500,000 barrels per day by 2014, due to the effects of high decline rates in its older fields, and the withering of foreign investment. This may explain the changing attitude of the Russian government toward large international oil companies. The Russian government just gave approval for a joint venture between a Russian Oil company and Total SA (NYSE:TOT) to develop a large natural gas field in the Arctic Ocean area. Russia also encouraged Royal Dutch Shell (NYSE:RDS.B) to participate in new leasing activity in the Sakhalin Island development, where blocks 3 and 4 need to be developed.
Iraqi Increase
Iraq is also beginning to open up its oil fields to foreign companies, with a who's who list of international oil companies lining up to bid. These include Conoco Phillips (NYSE:COP), Marathon Oil (NYSE:MRO), BP Inc. (NYSE:BP) and Chevron Corp (NYSE:CVX).
The Bottom Line
The IEA threw a dagger straight at the heart of oil bulls when it cut its medium term demand forecast for the next five years. However, if the old cliche "history repeats itself" has any validity, oil bulls will ignore this contradictory evidence and continue on. (To learn more, read our Oil And Gas Industry Primer.)
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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