OPEC releases World Oil Outlook 2018

25 September 2018

OPEC has released its annual World Oil Outlook report that includes forecasts for the world’s oil and energy markets through 2040. The 2018 edition of the report has revised upwards the global oil production estimates from the previous year.

In its reference case, the report sees the world’s total primary energy demand increasing from 274 million barrels of oil equivalent a day (mboe/d) in 2015 to around 365 mboe/d in 2040—an increase of about 25% and an average annual growth of 1.2% per year. Almost 95% of the increase is accounted for by developing countries (including China and India), with an average annual growth of 1.9% per year, while the energy demand in the OECD countries remains flat.

The forecast is based on the assumption of a global population increase from 7.6 billion in 2017 to 9.2 billion in 2040. The global domestic product (GDP) is expected to increase at an annual rate of 3.4%. As a result, the size of the global economy in 2040 is expected to be more than double that of 2017. Developing countries are expected to grow, on average, by 4.5% per year, providing the most significant contribution to the energy demand growth. GDP growth in the OECD region averages 1.8% per year.

Oil is forecast to remain the largest contributor to the energy mix throughout the forecast period, with a share of nearly 28% in 2040, higher than gas and coal. Despite relatively low demand growth rates (especially for coal and oil), fossil fuels are projected to remain the dominant component in the global energy mix, with a share of 75% in 2040—a drop of 6 percentage points from 2015. Coal is the only fuel projected to peak before 2040, with the consumption of all other fuels growing through the forecast period.

Long-term oil demand is expected to increase by 14.5 million barrels a day (mbd), rising from 97.2 mbd in 2017 to 111.7 mbd in 2040, with the majority of the growth over the next decade expected to come from US tight oil. The single fastest growing user of oil will be commercial aviation (+2.7 mbd), increasing consumption by 2.2% a year on average. However, a much larger absolute growth is predicted to come from road transport (+4.1 mbd), with the global number of vehicles on the road increasing from 1.1 billion to 2.4 bn in 2040. In the reference case, 320 million of these vehicles are electric vehicles.

The report also considers a scenario of ‘electric vehicles fast penetration’, with annual sales of electric vehicles reaching 79 million by 2040, and the corresponding EV fleet on the roads of 720 million. Under this scenario, the global oil demand would reach 109 mbd, rather than the 111.7 mbd under the reference case.

A significant source of oil demand growth—exceeding even that from road transport—comes from the industrial sector, driven mainly by petrochemicals (+4.5 mbd).

The fuel with the largest estimated demand growth is natural gas, increasing by almost 32 mboe/d between 2015 and 2040, an annual average growth rate of 1.7%. Consequently, the share of natural gas in the global energy mix accounts for 25% in 2040, up 3.3 percentage points from 2015.

Renewables are projected to have the highest average growth rate of around 7.4% a year during the forecast period. However, due to the current low base, the increase in absolute terms is estimated at around 19 mboe/d between 2015 and 2040.

Total annual energy-related CO₂ emissions are set to increase from around 33 billion tonnes (bt) in 2015 to around 39 bt by 2040. Despite the low growth in global coal demand and its expected peak towards the end of the forecast period, coal is still expected to be the largest source of CO₂ emissions, accounting for 15.7 bt of emissions in 2040. However, the largest increase in emissions, on an annual basis, is expected for natural gas (+3.3 bt).

Given the demand and supply outlook, the report emphasizes the need for significant investments across the industry. Overall, the outlook sees oil investment requirements of almost $11 trillion over the period to 2040. While investments picked up slightly in 2017 compared to the previous two years, and the expectations are for higher levels again in 2018, it is vital that as an industry we ensure there is timely and adequate investment so as not to lead to a supply shortage in the future—states the report.

Medium-Term Outlook & IMO Fuel Regulations. In the medium-term, global oil demand is expected to continue growing at healthy rates to reach a level of 104.5 mbd by 2023. This is 7.3 mbd higher than 2017 levels and represents an average annual increase of 1.2 mbd. The IMO global marine fuel regulations will be an important factor to affect global oil demand in the one-to-two years period following their implementation.

The IMO regulations to lower the maximum allowed sulfur content for marine bunkers from 3.5% to 0.5% effective 1 January 2020 will be disruptive to both the shipping and refining sectors. There are several key uncertainties surrounding the implementation of the IMO regulations—noted the report—including the compliance rate, the future marine bunker fuel mix, the response of the refining and shipping industry, as well as potential price implications. The uncertainty is partly the result of the variety of available compliance options. In principle, shipping companies have three options: (1) a switch to 0.5% compliant fuel from 2020 onwards (LSFO, middle distillates or a compliant blend); (2) continuation of HSFO consumption in combination with an on-board scrubber facility; and (3) a switch to an alternative fuel, such as LNG or biofuels.

LNG bunkering is not expected to play a major short-term role in helping companies comply with IMO targets in 2020. According to the OPEC analysis, most ship owners will be left to choose between the first two options—a switch to compliant fuel or the installation of a scrubber.

In early 2018, it was estimated that less than 500 vessels had installed or ordered a scrubbing facility. OPEC’s reference case assumes that installing scrubbing facilities will take off only from 2019, shortly before the IMO decision comes into force and once the financial incentive—in the form of a widening HSFO discount to compliant LSFO and gasoil—materializes. In 2020, it is estimated that there will be around 2,000 vessels with installed scrubbers. This is anticipated to be followed by a strong increase in the number to the end of the medium-term, with an estimated level between 4,500 and 5,000 scrubbers.

OPEC is projecting that demand for both diesel and compliant 0.5% fuel in the marine sector will increase strongly in 2020 (see figure below). Diesel demand in 2020 is estimated at around 1.4 mbd, an increase of 0.6 mbd from 2019. At the same time, demand for compliant LSFO is estimated at more than 1.5 mbd, up from around 0.3 mbd in 2019. For HSFO, its demand is projected to decrease from around 3 mbd in 2019 to some 1.2 mbd in 2020, based on the use of scrubbing facilities, as well as estimated non-compliance (an expected compliance rate of 75% during 2020, increasing to around 90% in 2023).

In order to produce sufficient volumes of middle distillates, the global refining system is expected to increase runs by around 0.4 mbd in 2020, additional to the case if no IMO regulations were adopted. The IMO regulations are expected to have a significant price impact on marine fuels and especially HSFO, considering the projected oversupply in the early years of its implementation. At the same time, LSFO and middle distillate cracks are expected to improve substantially, due to increasing demand.

Refining economics are expected to be dominated by the IMO regulation in 2020, with complex refineries—those with deep conversion units and geared towards distillate fuels—expecting to profit most in 2020. Simple refiners may experience a differentiated picture, with some upward tendency in margins for those with sweet crude intake, as they would be able to produce LSFO, but less benefits or even declining margins for those running sour and heavy streams.

Overall, the IMO regulation is expected to have a significant impact on both the shipping and refining industries, with a large degree of uncertainty regarding the implementation path, including the compliance rate. Due to a sudden switch in the fuel mix, potential shortages of compliant fuel are possible, especially middle distillates, which could spread to other sectors too. It is hoped, notes the report, that there will be sufficient flexibility in the refining system in order to avoid any extreme events in the years to come.

Source: OPEC World Oil Outlook