What global crude oil price in 2021?

A detailed study has been made to forecast the global crude oil price in 2021 by Nandini Consultancy Centre (www.nandinichemical.com), a chemical business research organization, based at Chennai and Singapore.

The study has been conducted by a team of chemical engineers and management professionals under the leadership of Mr. Swaminathan Venkataraman, Director, Nandini Consultancy Centre, Singapore.

Considering the various factors impacting the price, the study concludes that the rise in global crude oil price between 2018 and 2021 is inevitable.

Price fluctuation

The global price of crude oil has risen sharply in recent weeks.

The average price of crude oil (Brent, WTI, and Dubai), which was as high as USD 105.08 per barrel in 2013 fell to around USD 50.05 per barrel in 2015 and then further down to USD 42.81 per barrel in 2016 but has since then shown rising trend

Past price trends

Price USD / barrel

Source:         World Bank Commodity price statistics

The recent price trend represents a rise of around 40% since the beginning of 2016

Falling exploration efforts

Oil production is a capital intensive industry that requires management of existing production assets and evaluation of prospective projects, often requiring years of high investment on exploration, appraisal, and development before reserves are developed and produced.

The big oil fields that were discovered decades ago would inevitably begin to deplete. This means that new oil fields have to be discovered to sustain the global oil production to meet the future needs.

The oil exploration companies in the world used to spend around USD 450 billion annually on exploration and development. New oil fields typically require 4 to 5 years to be developed before the first drop of oil is produced.

It have not yet been tapped tend to be tight spots deep below the ocean, high in the Arctic or Antarctic or both.

Upstream costs of developing new oil wells are increasing due to rising rig rates, deeper water depths and costs of seismic technology.
Several global oil and gas exploration projects have been slowed down, and some have been put on hold in recent times, due to the low price of the oil and consequent poor economics of oil exploration business.

Royal Dutch Shell ended its nine-year effort to explore for oil in the Alaskan Arctic, which was a USD 7 billion investment. This is a sign that the global oil exploration industry has reduced the oil exploration efforts in the wake of the low crude oil price.

Due to the fall in oil prices, the global investment in production and exploration fell from USD 700 billion in 2014 to USD 550 billion in 2015, and the trend continues.
Global oil discoveries fell to a record low in 2016 / 2017, as companies continued to cut spending on new oil exploration efforts and conventional oil projects sanctioned were at the lowest level in more than 70 years.

As result of steady fall in crude oil price, oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years.

Falling oil production

In 2016, mature fields across the world, which constitute around one-third of global oil supply recorded total output drop by 5.7 percent, the steepest decline since 1992. In 2017, the decline is expected to be around 5 to 6 percent

Production from mature conventional oil fields in China dropped by around 9 to 9.5 percent in 2016
In the U.S. conventional oil fields production dropped by 11 percent in 2015 and the trend is continuing.
Oil production in Europe – concentrated in the offshore waters of the UK and Norway has fallen sharply.
UK production in 2016 was just under 48 million tonne, compared to a peak of 137 million metric tonnes in 1999. Norwegian output peaked two years later with almost 163 million metric tonnes in 2001. Last year, it stood at around 90 million tonnes.

Shale oil output in the USA

Shale oil is an important parameter and complements to the production of crude oil in the world.
US Energy Information Administration has revealed that oil production in the USA increased 3% in September 2017 to nearly 9.5 million barrel per day, a rise of more than 25% till September, 2017.
Nearly all of the increases in US oil production are from shale, which in total accounts for nearly two-thirds of the nation’s existing oil output.
The US shale industry has lowered its costs to such an extent that in many cases, it is now more competitive than conventional projects.

Decision to cut crude oil output

OPEC and non-OPEC producers led by Russia have agreed to extend oil output cuts until the end of 2018 to clear global glut of crude
Under the producers’ current deal, they are cutting supply by about 1.8 million barrels per day to boost oil prices
OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million barrels per day. Both countries have been exempt from cuts due to unrest and lower-than-normal production.

What expectations of OPEC members?

OPEC and Russia together produce more than 40% of global oil. Russia’s first real cooperation with OPEC has been crucial in the reduction of global oil stocks.
OPEC has decided to extend the cuts in crude oil production at end 2018 possibly due to its confidence that US shale producers will never be able to match its clout, especially with the global demand for oil currently growing by around 1.2 million barrels per day.
However, with oil prices rising above USD 60, Russia has expressed concerns that an extension of the whole of 2018 could prompt a spike in crude production in the United States.

Expectation of the International Energy Agency

With global demand for crude oil expected to increase by 1.2 million barrel per day a year in the next five years, the International Energy Agency (IEA) has repeatedly warned that an extended period of sharply lower oil investment in exploration efforts could lead to a tightening in supplies and consequent increase in price.

Possible impact on crude oil price due to spread of electric vehicles (EV)

In 2015, cars accounted for 19 million barrel per day of liquid fuel demand, which constitutes a fifth of global demand. All else being equal, a doubling in demand for car travel over the coming 20 years would lead to a doubling in the liquid fuel demand from cars.
However, improvements in fuel efficiency may reduce this potential growth in fuel consumption significantly, since manufacturers will have to adopt stricter vehicle emission standards, given the regulations.
The growth of oil consumption could decrease in future, as a growing number of countries take steps to give up liquid fuel driven cars and replace them by electric vehicles.
Some electric cars are expected to rise significantly from 1.2 million in 2015 to around 100 million by 2035 (~6% of the global fleet). Around one-fourth of these electric vehicles (EVs) are plug-in hybrids (PHEVs), which run on a mix of electric power and oil, and three-quarters are pure battery electric vehicles (BEVs).
However, the impact of electric vehicles on the global oil consumption by 2021 is unlikely to be significant, since the introduction of electric vehicles on the road have commenced only recently.

Likely scenario in future

Crude oil prices are likely to rise in 2018 and will remain volatile in the next few years because of the ongoing structural changes such as the following
® OPEC and Russia’s decision to cut oil supply (1.8 MMbpd) until 2018 end.
® Possible increased shale oil supply from the USA, that may replace any cut in the crude oil production by OPEC countries.
® However, one has to keep the fingers crossed with regard to the level of impact of shale oil production from the USA on the global oil supply in future. This would be so since the life of shale well is not long and the adverse ecological impact of the shale wells are hotly debated in the USA now. There may be considerable resistance from the public to expand the shale well operation to new regions in the USA
® Because of the shale oil supply from USA stocks have been built, and they will play a larger role than in the past in influencing the global price in the immediate future.
® In all probability, the global oil price would increase due to the following factors.

· Steady increase in global demand

· Slowing global oil and gas exploration efforts and rising cost of new exploration efforts, which will adversely impact the oil production in future.

· Political developments in Middle East region and conflict of interests between the oil-producing countries in the Middle East region.

· Shale oil supply prospects from the USA

· The oil consumption due to introduction of electric vehicles would go down significantly, only if the power for recharging batteries of the electric vehicles is from nonoil based energy source

Considering the above factors and accounting for the possible volatility in price, it is judged that the global crude oil price would increase at an average of 2 percent per annum between 2018 and 2021.

Global crude oil price forecast

(in USD per barrel)