The arrival of the coronavirus is rattling a global oil market that was already facing challenges. On the demand side, growth in 2019 was significantly weaker than expected and new vehicle efficiency measures have started to weigh on transport fuels. Refining capacity additions in recent years have outstripped demand growth, bringing tough competition for an industry already challenged by tightening product specifications, most notably the new International Maritime Organisation (IMO) bunker rules introduced at the beginning of 2020.
On the supply side, geopolitics remain a wild card. Production losses from Iran, Libya and Venezuela have reached a combined 3.5 mb/d since the start of 2018. Even before the coronavirus, markets had been over-supplied, leading OPEC+ producers to cut output. Looking beyond the short term, the oil market looks comfortably supplied through 2025.
Following a contraction in 2020 and an expected sharp rebound in 2021, global oil demand growth is set to weaken as consumption of transport fuels increases more slowly. Between 2019 and 2025, global oil demand is forecast to grow at an average annual rate of just below 1 mb/d. Petrochemicals become an ever more important driver, with naphtha, liquefied petroleum gas (LPG) and ethane responsible for half of all growth. Efforts to improve the sustainability of the plastics industry will run up against the steady increase in demand from consumers in developing countries. Bans imposed on single-use plastics and recycling, even if fully implemented, will displace only a very modest amount of oil demand. Through 2025, global oil demand rises by a total of 5.7 mb/d, with China and India accounting for about half of growth.
At the same time, the world’s oil production capacity is expected to rise by 5.9 mb/d. Non-OPEC supply will rise by 4.5 mb/d while OPEC builds another 1.4 mb/d of crude and natural gas liquids capacity. This assumes that there is no change to sanctions on Iran or Venezuela. The United States leads the way as the largest source of new supply. Given its huge resource potential, it could produce even more if prices end up higher than assumed in this report. Brazil, Guyana, Iraq and the United Arab Emirates also deliver impressive gains.
Strong growth in Asian oil demand is creating major opportunities for oil producing countries that can boost exports. But growth in non-OPEC production is set to lose momentum after a few years, indicating a greater role for OPEC+ countries. The pace of expansion in the United States is slowing as independent producers cut spending and scale back drilling activity in response to pressure from investors. The deceleration in US and other non-OPEC growth from 2022 will allow OPEC producers from the Middle East to turn up the taps to help keep the oil market in balance, thereby increasing their importance for oil consuming countries.