McKinsey Energy Insights Expects Delay in Full Oil Price Recovery Until Late 2020

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, in which the company projects that global oil prices will remain in the USD50/bbl-USD60/bbl range until late 2020. The outlook outlines oil supply and demand balances as well as macro outlooks on global oil price scenarios to 2030.

With market uncertainty causing oil prices to decline from USD55/bbl in January to USD46/bbl in June this year, MEI has revised its “lower for longer” scenario. Over the medium term (2017-2020), with inventories still being absorbed, MEI considers it likely that Brent prices linger in the USD50/bbl range until early 2020, only approaching USD60/bbl in late 2020.

The outlook is driven by market uncertainties, which are a mixture of negative (supporting lower prices) and positive (supporting price recovery) market fundamentals. In the medium term, six key signposts are expected to impact the speed of market rebalancing and price recovery under MEI's “lower for longer” scenario:

  1. Global oil demand growth: Liquids demand growth gradually slows down to 1MMb/d p.a. in 2017-21 driven by flattened global economic growth, improved energy efficiency and alternative fuels.
  2. Non-OPEC production: Decline rates have visibly accelerated in onshore conventional fields which will result in 1MMb/d p.a. declines in production up to 2021.
  3. OPEC production: OPEC is expected to adhere to production cuts and then ramp up production when markets tighten again, following historical patterns.
  4. North American shale oil: North America shale oil output is projected to keep growing despite low prices, reaching 6.6MMb/d by 2021 due to improved breakevens and capital availability.
  5. New project costs: Production from projects reaching final investment decision (FID) after 2014 is not enough to fill the supply gap, which results in tightening in global oil markets by 2020-21.
  6. Commercial inventories: Inventory build-up has stopped without much withdrawal despite the expectations based on flattening futures spread, yet it will take two to three years for stocks to go back to five-year average levels given the current overhang.

In the long term (2020-2030), MEI estimates that exploration and production companies will need to add 35 MMb/d of new crude production from unsanctioned projects by 2030 to meet demand. Under these circumstances, 2025-2030 marginal costs are projected to reach USD60/bbl-USD70/bbl.

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