Oil companies are reviving investment after a two-year rout as OPEC output cuts boost prices, easing but not eliminating the risk of a future supply crunch, the International Energy Agency said.
There are “signs of a modest recovery” in spending in 2017 following two years of big investment cuts, the Paris-based agency said Monday in a report. The IEA doubled forecasts for production growth outside OPEC next year as U.S. shale producers emerge “leaner and fitter” from the downturn.
The Organization of Petroleum Exporting Countries and Russia headed an agreement among 24 oil producers last year to clear a global glut, spurring a 20 percent rally in crude prices. Before that decision, OPEC had refused to reduce output on the grounds that any curbs would bail out rival producers.
“Until the agreement was struck, prices threatened to return to the levels seen in early 2016” of less than $30 a barrel, the agency said. “Another period of falling prices could have further pushed back critical investment decisions, and threatened the production recovery needed” at the end of the decade, it said.
Investment will increase this year after back-to-back declines of about 25 percent slashed global investment to $433 billion in 2016, according to the IEA, which advises most of the world’s biggest economies on energy policy. The agency had warned in September that investment could drop again this year.
U.S. producers are leading the spending revival, and will contribute most of the growth in supplies outside OPEC through to 2022, the IEA said. American drillers will add a total of 1.6 million barrels a day, up from the projection in last year’s report that they would add 1.3 million by 2021. U.S. drilling has expanded for a 10th month, according to the rig count by Baker Hughes.
The outlook for Russia improved significantly, the IEA said. Instead of the decline projected in last year’s report, the agency now sees the country maintaining output at 11.3 million barrels a day, near a post-Soviet record.
Non-OPEC supply as a whole will expand by 3.3 million barrels a day in the period from 2016 to 2022, compared with a prediction last year of 2 million a day through to 2021. Still, new investments must be approved soon to ensure sufficient supply after 2020, it said.
Production from non-OPEC will climb by 1.3 million barrels a day in 2018, more than double the amount projected in the previous report. As a result, demand for OPEC’s crude will be steady, at 33 million a day, allowing the group to reverse the cuts it’s made, yet leaving little scope to absorb additional capacity among members.
In subsequent years output growth could “stall” outside of the U.S., Canada and Brazil and the resulting draw on OPEC will diminish the group’s spare capacity, the agency predicted. As a result, the global industry needs to continue spending to ensure supplies will be sufficient, it warned.
“Global oil supply could struggle to keep pace with demand after 2020, risking a sharp increase in prices, unless new projects are approved soon,” it said.