It's far from clear demand will drive up oil prices in 2016

US oil-rig numbers continued to slide through October and tight oil-production growth is finally slowing down, with 2016 now projected to record the first year-on-year contraction in output in five years. But the question is, will the expected 400,000-barrels-a-day drop in US production next year be enough in the face of up to 1 million barrels a day (mmbd) of extra supplies from Iran?
Equally crucially, as the emerging economies around the world face fresh headwinds, and forecasts for growth in global gross domestic product continue to be revised downwards, how confident are we of the rise in oil demand next year?
The average of the latest forecasts by the International Energy Agency, the US Energy Information Administration, and the Organisation of the Petroleum Exporting Countries (Opec) is a 1.28mmbd year-on-year rise in global oil consumption in 2016, compared with estimated 1.53mmbd growth this year.
China, which reported 6.9-per-cent GDP growth in the third quarter, its slowest since the 2008 global financial crisis, has had a voracious appetite for crude oil this year, helped by the filling up of its newly built strategic storage facilities. Chinese crude-oil imports over the first nine months of this year averaged 6.68mmbd, up a 8.8 per cent on the corresponding period of 2014. But attention now seems to have turned to what Chinese demand will be once the storage tanks have been filled.
Though Opec’s output in September dipped 60,000b/d from a month ago to 31.2mmbd, Saudi Arabia was the only member to rein in supplies.
Nearly a year after the Saudi-led decision to defend market share rather than prices, Opec looks set to stick to its current policy at its December 4 meeting.
Venezuela, which has been advocating coordinated action on oil production to support prices, advanced the idea of agreeing an “equilibrium” global target of $88 a barrel at a closely watched technical meeting of a number of Opec and non-Opec producers in Vienna on October 21. But the meeting did not even come close to talking about any production cuts.
Even as upstream producers adjust to oil’s new economics, a bigger game-changer could be their growing pivot towards natural gas, which was evident at a climate-change forum in Paris mid-October. The chief executives of 10 major producers, which account for nearly a fifth of the world’s oil and gas output, committed to boosting the share of gas in the energy mix under an “Oil and Gas Climate Initiative”.
Looking further out, UK-based think tank Carbon Tracker Initiative is predicting demand destruction of all three major fossil fuels – oil, gas and coal – over the coming decades.
It asserts that the typical industry scenarios calling for growth of 30-50 per cent in fossil-fuel demand by 2040 do not take into account the push to decarbonisation amid national emissions-reduction plans, advances in energy efficiency and clean technology, the global decoupling of energy demand from economic growth, rapidly falling costs of energy storage, and a likely exponential growth in electric vehicles, which could rob oil of its largest market, the transport sector.
Could such a tectonic shift mean oil prices not just lower for longer but lower forever?

Vandana Hari is the Asia editorial director at Platts, a global energy, petrochemicals, metals and agriculture information provider and a division of McGraw Hill Financial. She can be contacted at [email protected].