Global oil market

For the first time since 2013, demand on the global oil market exceeded supply last year. This resulted both from sustained growth in oil consumption as well as measures adopted by a group of exporting countries to curtail production. The change in this balance led to an increase in oil prices in addition to their relative stability throughout the year. These factors will continue in 2018, meaning the oil can expected to remain balanced.

Stabilization of the oil market

The International Energy Agency (IEA) estimates that the global oil deficit averaged 0.46 million barrels per day in 2017 (versus a surplus of 0.7 million barrels per day in 2016). By the end of the year, the deficit had increased, and oil reserves in OECD countries alone were already declining at a rate of about 1 million barrels per day. The current situation, among other things, resulted from the actions of a group of oil-exporting countries, which in late of 2016 decided to limit production by a total of 1.8 million barrels per day. The purpose of the agreement, in which Russia is a key party, is to reduce oil reserves to the average level seen over the past five years. Over the course of 2017, the surplus of reserves declined from 340 million to 74 million barrels, partly due to an increase in the average OECD reserves over the past five years with respect to which the surplus is determined. The goal of the agreement is expected to be met in 2018, which may allow its parties to revise the benchmarks for production.

Balance of the oil market in 2013−2017 (mn barrels/day) Source: IEA

Surmounting the surplus on the physical market supported oil prices and ensured their stability throughout the year. From January until the end of December 2017, spot prices for Brent crude were up by about USD 10 per barrel, while the average price was USD 54.20 per barrel (versus USD 43.4 in 2016). The volatility of oil prices has significantly subsided compared with 2016.

OECD oil reserves (bn barrels) Source: Energy Information Administration of the US Energy Ministry

Geopolitical factors, which the market frequently ignored during the oil surplus period, once again began to affect prices in 2017. Disruptions in oil supplies from Kurdistan and political events in Saudi Arabia resulted in a noticeable reaction from the oil market in late 2017. The stability of oil supplies once again loomed large in determining the market situation.

Brent oil prices in 2013−2018 (USD/barrel) Source: Energy Information Administration of the US Energy Ministry

Stable demand for oil

As in the previous few years, steady growth in the global economy in 2017 ensured a substantial increase in the consumption of oil and other energy resources. According to the International Monetary Fund (IMF), the world economy grew by 3.7% in 2017; this pace is expected to accelerate in 2018 and 2019. In these conditions, global oil consumption in 2017 maintained a high level of growth, which according to the IEA amounted to 1.6 million barrels per day versus 1.2 million barrels per day in 2016. Asian countries led the way in terms of increased consumption with demand in the region expanding by 1 million barrels per day due to continued high growth rates in the economies of China and India.

At the same time, the most developed countries made a significant contribution to increased demand for oil around the world. Over the past year, the Eurozone economy saw significant growth, which affected the consumption of petroleum products: demand for oil in Western Europe expanded by 0.3 million barrels per day. The IEA expects global demand for oil will reach 100 million barrels per day in the first half of 2019.

Demand for oil by country/region in 2013−2017 and the corresponding expectations of the IEA by 2040 (mn barrels/day) Source: Energy Information Administration of the US Energy Ministry
GDP dynamics of key economics in 2013−2017 (%, YoY) Sources: Bureau of Economic Analysis, U.S. Department of Commerce; Eurostat; National Bureau of Statistics of China; Central Statistical Organization, India; Rosstat

A soft monetary policy was partially responsible for the accelerated growth in Western economies. A low level of inflation allowed the financial authorities of the U.S. and the Eurozone to maintain low interest rates, which, in turn, creates favourable conditions for financial markets and mitigates the risk of negative developments in the world economy in the short term.

The global automotive market, which is an indirect indicator of the demand for oil, slowed down somewhat in 2017 as fuel prices increased and government support for automotive markets decreased. Car sales in major markets – China and the U.S. – in 2017 fluctuated negligibly from the 2016 results. Global vehicle sales slowed compared with 2016 with only a roughly 3% increase.

At the same time, sales of cars that run on alternative fuels continue to grow rapidly. An estimated 1.2 million electric vehicles were sold in 2017, a 60% increase from the previous year. However, despite the high growth rates in sales, electric cars make up slightly more than 1% of the market for new cars and have an even smaller share in the global structure of such vehicles.

Strong growth has been seen in the consumption of petroleum products in air transport. According to the IATA, the global air transportation market expanded by 7.6% in 2017, which is much higher than the average rate for the last 10 years (5.5%). These dynamics confirm the forecasts stating that the aviation and petrochemical industry, apart from road transport, will account for a significant portion of increased oil consumption in the coming years.

Growth in consumer prices (%, YoY) Sources: Bureau of Labor Statistics, U.S. Department of Labor; Eurostat; Federal Open Market Committee; European Central Bank
Car sales in the U.S., China, and EU (mn cars) Sources: Autodata Corporation; China Association of Automobile Manufacturers
Structure of passenger car sales in the U.S. and China in 2017 (mn cars) Sources: Autodata Corporation; China Association of Automobile Manufacturers
Sales and the global fleet of electric vehicles and cars with IC engines in 2017 Source: www.ev-volumes.com, Gazprom Neft analysis
Change in oil consumption by industry until 2040 (forecast, mn barrels/day) Source: IEA

Position of the main producers

Rising oil prices and cost optimization in the oil and gas industry are driving a revival of investment activity in the sector. The declining investment in the global oil industry that had been seen since 2014 came to a halt in 2017. Investment in the sector is expected to grow by 10-15% in 2018, and the number of authorized oil production projects will increase.

Companies working in the private sector are planning to significantly increase oil production in 2018, meaning competition between producers and between different production classes will continue to expand despite the increase in oil consumption.

U.S. companies specializing in shale production rapidly increased drilling activity and production over the course of 2017. Even though as of the end of the year the number of active oil drilling sites was half what it was at its peak in 2014, the volume of shale production was comparable. As a result, by the start of 2018 total oil production in the U.S. had approached the all-time highs seen in 1970. The jury is still out on the long-term prospects for growth in of shale production, but a significant increase in production can be expected in 2018 and this segment will arguably continue to play an important role in ensuring the balance of supply and demand on the world oil market.

Investment by major foreign oil industry companies Source: company data, Gazprom Neft calculations

A revival has been seen in traditional oil production. The number of large-scale production projects authorized in 2017 significantly exceeded the level seen in 2016. In some cases these were projects that were frozen when oil prices declined in 2014–2015. The technical optimization of projects, a reduction in operating costs, and lower prices for equipment and services made it possible to create lower payback levels for these projects, which made them desirable given the moderate oil prices.

Oil drilling and production dynamics at impermeable layers in the U.S (mn barrels/day) Source: Energy Information Administration of the US Energy Ministry

Company strategy

“The number of global trends affecting energy consumption is increasing. Thanks to technological development, it has become possible to incorporate new hydrocarbon reserves around the world into development. Given the high uncertainty of the current situation, Gazprom Neft adheres to moderately conservative forecasts regarding the price of oil”.
Alexey Yankevich Gazprom Neft PJSC

The instability seen on the world oil market in recent years, on the one hand, has led to less investment by global oil companies in large projects and on the other hand, to the increased popularity of investments in relatively short projects on a small scale. Some of the industry’s largest companies have acquired significant assets in shale oil production, while some major companies have made this segment their focus of growth for the next few years.

Guided by the interests of shareholders and the public as well as possible long-term changes in the market, some oil companies are spending a growing share of their investments in areas that are not directly related to oil and gas production. The most popular areas are renewable energy and the electricity market as a whole, projects for the utilization of carbon dioxide, and digital technologies. Such areas make up a small percentage of the overall structure of investments, but this trend may have an impact on investment in core activities given the limited financial resources in the global oil industry.

This situation makes the risk of a supply shortage in the medium term – in three to five years – a vitally important issue. Given that countries of the Middle East are the main source of ‘quick’ supply in the event of a deficit, the political stability in the region may be considered a key factor for the oil market.

Main factors for the oil market in 2018
Economic growth dynamics
Implementation of the OPEC+ agreement
Shale production dynamics
Political stability in producing regions