The current dramatic cuts in exploration and production will have a long-lasting impact on the global oil market, with oil prices spiking to above $68 a barrel in 2025, when there could be a supply deficit of 5 million barrels per day, Rystad Energy said this week.

“Even though the world is currently facing what is arguably the largest oil glut ever recorded, the tables will turn dramatically in coming years,” the energy research firm said.  

As all oil companies moved into survival mode after the oil price crash in March, investments in exploration and new production are set to be delayed because companies are looking to preserve cash and avoid cutting dividends--something oil majors Equinor and Shell just did. So, global investments and project sanctioning activity are already drying up this year.

 

Due to the oil price crash, Rystad Energy expected at the end of March that exploration and production (E&P) companies were likely to reduce project sanctioning by up to $131 billion, or down about 68 percent on the year, compared to $192 billion in projects approved in 2019.  

Muted investment levels and new project activity will combine with the rebound in global oil demand once the coronavirus crisis is over to swing the global oil market into a potential oil supply deficit of some 5 million bpd, according to Rystad Energy’s latest estimates. Oil prices would top $68 a barrel to balance the market, the consultancy said.  

The gap will be likely filled mostly by OPEC’s biggest producers – Saudi Arabia, Iraq, and the United Arab Emirates (UAE) – which could contribute a total of between 3 million bpd and 4 million bpd to fill the expected 5-million-bpd gap. The rest will likely come from U.S. shale.

 

 

In the U.S. shale patch, the response with investment and curtailments has been immediate with immediate effect on production, but the drastic cut of new wells will leave fewer such wells available for production in the long term, Rystad said.

“The current low oil price has tightened the medium-term supply and demand balance considerably,” says Rystad Energy Head of Upstream Research Espen Erlingsen.

“As demand is expected to recover, the core OPEC counties will need to increase their supply significantly or the market will face even higher prices than our base-case forecast,” Erlingsen added.