OPEC Says $95 Oil Coming, But Not Until 2040

This week opened with the average global price of oil at an 11-year low, yet OPEC expects its own producers eventually will cut back on production, causing prices to rebound to $70 per barrel by 2020.

That may seem a long time for producers to wait for oil to become more profitable, but in OPEC’s annual World Oil Outlook, issued Wednesday, the oil cartel does not see oil prices returning to the heights of $110 per barrel, where it was before the price crisis began in June 2014. Instead, it says it doesn’t expect prices to reach even $95 per barrel until 2040.

The group’s own reference list of crudes, known as the OPEC Reference Basket, was as low as $30.74 per barrel on Monday, while the world benchmark Brent crude was a bit higher at $36.35 per barrel, its lowest in more than 11 years.

But the report stressed that “a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market.”

The prices began to fall because of a glut in the market caused largely by new production in North America, where U.S. drillers relied on hydraulic fracturing to get oil from shale and Canadians had to extract oil from its western tar sands. Both are expensive, though, and production in the continent has slowed as profits narrowed.

Iran appears ready to take up this slack once a lifting of Western sanctions over its nuclear program frees it to resume production, probably in early 2016. Even so, at its Dec. 4 ministerial meeting in Vienna, OPEC refused to cut production and even dropped its output ceiling of 30 MMbpd. Indeed, in November, even before the meeting, the cartel produced 31.7 MMbpd.

Still, the Outlook expects OPEC to reduce production, at least briefly, by the end of the current decade, a move likely to bolster oil’s price. Here is its current scenario: “OPEC crude supply rises from 30 MMbpd in 2014, up to 31 MMbpd in 2015. It then falls gradually to 30.6 MMbpd in 2019, before rising slightly to 30.7 MMbpd by 2020.”

It also sees the current trend of lower spending and therefore lower production by non-OPEC producers eventually cutting into the supply of oil, increasing demand and thereby raising prices. One chart in the report shows an expectation that non-OPEC production will rise from 57.4 MMbpd in 2015 to 61.5 MMbpd in 10 years, then decline to 59.7 MMbpd by 2040.

But all this depends on capital spending by oil companies. If it doesn’t increase, OPEC Secretary-General Abdallah el-Badri wrote in the report’s foreword, “there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices.”

While OPEC expects the demand in many Western countries is likely to decline between now and 2040 due to “energy efficiency improvements and climate change mitigation policies. … However, oil demand in developing countries is expected to increase significantly (by almost 26 MMbpd) to reach 66.1 MMbpd at the end of the forecast period. Finally, demand in Eurasia is estimated at 5.8 MMbpd in 2040.”

The key, then, is for oil companies to maintain balanced investments in exploration, infrastructure and production, according to el-Badri. “In the current market environment, what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supplies,” he wrote. “This balance is essential in making sure the necessary future investments are made.”

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