Global oil market

Global energy in searchof a balance

Hydrocarbons continue to play a key role in the global economy, making up approximately 90% of primary energy consumption. A steady increase in global demand for oil in 2016 helped to reduce the supply glut on the market even with rapid production growth in the Middle East. Measures to restrict production and further increase consumption could create conditions for a balanced market in 2017.

Brent oil prices  (USD/barrel) Source: U.S. Energy Information Administration
Balance and dynamics of global liquid hydrocarbon production and consumption  (mn barrels/day) Source: IEA
The main factors affecting the oilmarket in 2016
  • Steady growth in consumption
  • Oil production growth in Iran
  • Reduced production in the U.S.
  • An agreement among oil producers to limit production

Stable growth in oil consumption

The global economy continued to see moderate growth rates in 2016. According to preliminary estimates from the International Monetary Fund, global GDP expanded by 3.1% (following growth of 3.2% in 2015). The dynamics of developing economies also remained stable, while economic growth slowed in the most developed nations. The risk of changes in the growth rates of the Chinese economy receded into the background. The continuation of active quantitative easing measures both in developed as well as developing economies makes it possible to count on continued economic growth. The expansion of the global economy and low hydrocarbon prices helped to keep demand for oil at a high level. Global oil consumption continued to rapidly grow in 2016. According to the International Energy Agency (IEA), consumption increased by 1.6 million barrels/day to 96.6 million barrels per day last year. Thus, the growth in demand significantly exceeded the IEA’s earlier forecasts. The estimate for growth in demand in 2015 was also increased to 2 million barrels/day. Developing nations played the key role in the higher demand as did increased consumption in Europe. The IEA expects that oil demand will grow by another 1.4 million barrels/day in 2017 and then continue to increase by an average of 1.2 million barrels/day annually before reaching the level of 100 million barrels/day in 2019-2020.

Oil market balance of supply and demand in 2015-2016 (mn barrels/day) Source: IEA
Change in oil consumption by country  (mn barrels/day) Source: BP Statistical Review of World Energy June 2016
Gdp dynamics of key economics (% vs. previous year) Source: World Bank
Global oil consumption  (mn barrels/day) Source: IEA
Growth in global oil demandby sector from 2015 to 2040 (mn barrels/day) Source: IEA

Continued growth in car ownership

Demand for petroleum products in the primary consumer segment – the automotive sector – continued to increase. Despite the high level of car ownership, sales of passenger cars in the U.S. and Europe broke the previous record in 2016, while sales in China increased by 13.7% with government support from tax breaks for the purchase of small cars. The extension of tax breaks for 2017 means further dynamic growth in the Chinese car market can be expected.

Car sales (mn cars) Source: OICO
Car ownership Source: OICO, World Bank, Kraftfahrt-Bundesamt Deutschland, Ministry of Public Security China, ICCT

Petrochemical sector – a key factor for increased demand

Consumption in the petrochemical sector accounted for roughly half of the growth in global demand for petroleum products in 2016. The primary source of demand included Asian countries, which increased petrochemical production capacity, and the consumption of liquefied hydrocarbon gases.

The petrochemical industry along with the transport sector is expected to become the key source of growth in demand for refined products in the medium-term.

Global oil production

Decreased production in the U.S.

The U.S. had the most pronounced decline in production in 2016 compared to other major countries. Decreased activity in the unconventional oil production segment led to a reduction in the average liquid hydrocarbon production level by 0.5 million barrels/day. At the end of the year, however, growth in oil prices led to increased drilling activity and U.S. production volumes stabilised. The further dynamics of U.S. oil production could have a serious impact on the global balance of supply and demand.

Active drilling rigs and shale oil production dynamics in the U.S. Source: U.S. Energy Information Administration

Growth in production by OPEC countries

OPEC countries increased production by 0.9 million barrels/day in 2016. The bulk of growth came from Iran, which quickly returned to its pre-sanctions production levels following the lifting of the international embargo. In the future, Iranian oil production dynamics will be constrained by the development rates of new fields, which frequently require the involvement of foreign investors.

In late 2016, OPEC countries reached an agreement to restrict oil production, which was joined by a number of producers outside of the alliance, including the Russian Federation. The agreement calls for its participants to reduce oil production by 1.8 million barrels/day versus the October 2016 level by mid-2017. The successful implementation of the agreement should not only result in a more balanced market, but also a decrease in the supply glut of oil and petroleum products.

The production reduction agreement did not include Libya and Nigeria since their oil production was already restricted at the time the agreement was signed due to political instability. The rates at which these countries potentially resume oil production create major uncertainty on the oil market. 1.6 mn barrels/day – growth in production by OPEC countries prior to 2020 according to IEA forecasts, which will primarily result from Iran resuming production following the lifting of sanctions.

OPEC oil production forecast (mn barrels/day) Source: IEA

Decreased investment in oil production

An additional factor that will restrict the supply of oil in the medium-term is a decrease in the oil industry’s global investment in production, which continued in 2016. After oil prices fell in the second half of 2014, international oil and gas companies cut investment by roughly half.

Change in investment by major global oil and gas companies Major international companies in the sector. Source: analysis by Gazprom Neft based on data from company statements

Market expectations and key factors in 2017

Brent forward curve (USD/barrel)

In general, supply and demand dynamics, a decrease in the oil shortage on the market and changes in the tactics of manufacturers will mitigate the risks of price volatility in the near future.

Main factors affecting the oilmarket in 2017
  • Growth in global oil consumption
  • The effect of the agreement among oil producers to limit production
  • U.S. oil production dynamics
  • Geopolitical restrictions on oil production in OPEC countries (Libya, Nigeria)