"Significant" Oil Supply-Demand Gap is Again Cited at Abu Dhabi Energy Conference

IEA's Fatih Birol has warned that the shortage could come as early as in three years' time.

The discrepancy between the notion that the world is drowning in oil inventories that will take years to reduce and the argument that we'll soon run short of supply was widened even further this week by Fatih Birol, executive director of the International Energy Agency, who on Friday said a "significant" supply-demand gap is possible in as early as three years.

Speaking to delegates at the Atlantic Council Global Energy Forum in Abu Dhabi, Birol noted that "We are entering an era of more oil price volatility," and he went on to state that "We believe that this year, if there are no major oil projects starting, ... in three to four years' time we may see a significant supply-demand gap, with major consequences.

"This will not be filled by shale oil; this is why we may now be entering an era of greater oil volatility."

Speaking at the same conference earlier this week, Khalid al-Falih, energy minister for Saudi Arabia, told delegates that the world may run short of oil by 2020: "From what I can see, within two to three years there will be tightness because many projects have been deferred and delayed," he said, adding that the situation could be exacerbated by the "not insignificant" natural decline in output from large, mature fields in the Middle East and elsewhere.

Like Falih, Birol supported his argument by pointing out that declining global investment in oil development in 2015-2016 is without precedent, and that following this period was two years of collapsed prices that discouraged exploration and led to no large discoveries.

He added, "In 2017 we have to see major new investment to calm the market, otherwise, in two to three years, that supply-demand gap will be with us"; however, he conceded that 2017 numbers don't indicate a rebound from 2016, so "we may well see a third year of investment decline if no new projects are undertaken."

Arab countries and administration at the Organization of the Petroleum Exporting Countries (OPEC) have throughout the price downturn and oil glut insisted that a shortage is imminent due both to lack of investment and demand from emerging nations: "While the recent oil market environment has been one of oversupply, it is vital that the industry ensures that a lack of investments today does not lead to a shortage of supply in the future," stated Mohammed Barkindo, secretary general for OPEC, in November.

Should such a scenario unfold, Barclays believes prices could peak at an average of $85 per barrel by 2019.

However, given the recent record output of countries that have rejected as well as embraced the OPEC cutback agreement, combined with persistent forecasts of weakened demand in key consuming countries such as China due to poor economic growth, it's tough to imagine going from glut to drought in so short a space of time.

Goldman Sachs has a tough time imagining it too: last September, it warned that the glut will continue regardless of what measures OPEC takes, and that returning supply for Iraq, Libya, and Nigeria could compel it to reduce its average 2017 price forecast for U.S. crude from a $52.50 projection to $45 per barrel.