Some relief from tight oil supplies should be forthcoming during the next couple of years, but supply capacity growth will fall back below demand growth by 2011, based on current trends and assumptions, the International Energy Agency says. In its latest Medium-Term Oil Market Report, the IEA also says current high oil prices are the result of tight market conditions rather than speculation:

While recognising that speculation can have a day-to-day impact of price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stockbuild gives a strong indication that current oil prices are justified by fundamentals.

Over the next two years “Supply growth deriving from a concentration of new project start-ups during 2008-2010, allied to weaker economic growth, sees potential spare capacity rise in excess of 4 mb/d. However, this expansion slows from 2011 onwards when global demand growth recovers, leading to a narrowing of spare capacity to minimal levels by 2013,” the IEA says.

Since the 2007 Medium Term Oil market Report, significant downward revisions have been made to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline of 5.2% - up from 4% last year – are the factors behind these revisions. Over 3.5 mb/d of new production will be needed each year just to hold global production steady, the IEA says.

Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream — to assure that the market is adequately supplied.

Although biofuels will add to supply growth, increasing from 1.35 mb/d in 2008 to 1.95 mb/d by 2013, announced capacity additions may be difficult to achieve given available feedstock and growing concerns due to rising food prices.

Global demand for oil products will grow by an average of 1.6% per year to 2013, from 86.9 mb/d in 2008 to 94.1 mb/d. Contrary to supply trends, demand growth will be weakest in the first two years of the period, building as global GDP growth strengthens from 2010 on.

An anticipated 8.8 mb/d of crude distillation capacity will be added to the refinery system by 2013, the IEA says.

These additions should cover supply increases over this period and help ease current refinery tightness, which limits the flexibility of the industry to meet the structurally-strong demand growth for middle distillate fuel. A doubling of costs and longer lead times for delivery of key upgrading units have led to greater uncertainty over project plans in the refining sector. New capacity additions are primarily in China, Asia and the Middle East. Additional investment is expected in upgrading capacity and desulphurisation units.

The 2008 Medium-Term Oil Market Report can be purchased from the IEA website.

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