McKinsey Energy Insights (MEI), the data and analytics specialist that provides distinctive insight and support to the global energy industry, has released its latest Global Oil Supply and Demand Outlook, which identifies five potential supply and demand scenarios. If the market was to follow MEI’s business as usual scenario, it would expect oil prices to revolve around USD 60 to 70/bbl over the next three years and balance close to USD 65 to 75/bbl by 2030.
The outlook highlights that if OPEC continues to adhere to the output cut deal—it achieved 90% compliance in January – then the short-term market rebalancing process is expected to proceed relatively smoothly over the coming months. MEI expects strong growth in North America’s light tight oil (LTO) production, while accelerated legacy declines due to the lack of upstream investment will help reduce oil oversupply. The excess inventory in the market will lead to increased price volatility in the near term.
MEI has identified six key supply and demand drivers that will contribute to long-term oil price recovery. On the demand side, slower growth in global GDP – 2.5 to 2.7% per annum – coupled with decreasing oil intensity due to improved energy efficiency and alternative fuels will drive a structural deceleration in oil demand growth.
On the supply side, the level of decline in legacy production, the cost of new production, and LTO and OPEC production will all affect the supply stack. MEI projects that the change in supply mix towards energy resources with faster decline will lead to a faster-than-usual global decline rate, while new production sources will become more economic than 2014 levels due to cost-cutting strategies introduced during the downturn. Aggregated cost improvements are expected to yield 15 to 20% reductions in project breakeven price (versus current 30% to 35% reductions). US LTO will return to a formidable source of growth, while OPEC production will continue to grow with the market while maintaining constant market share.
Based on these conditions, MEI estimates that E&P companies will need to add 35 MMb/d of new crude production from unsanctioned projects by 2030 to meet demand which would require USD 1.6 trillion cumulative capital investment over the next 5 years. To meet these investment needs, upstream capex is expected to grow by approximately 6% per annum but remain below the 2014 peak by approximately 24%.
The outlook was developed by MEI analysts after reviewing forecasting models from MEI’s interconnected suite of products, which help uncover a more coherent view of oil and gas markets.