Executive summary World oil markets reset Global oil markets are gradually recalibrating after three turbulent years in which they were upended first by the Covid-19 pandemic and then by the Russian Federation’s (hereafter “Russia”) invasion of Ukraine. Benchmark crude oil prices are back below pre-war levels and refined product cracks have now come off alltime highs after rising supplies coincided with a marked slowdown in oil demand growth in advanced economies. Moreover, an unprecedented reshuffling of global trade flows and two consecutive emergency stock releases by IEA member countries in 2022 allowed industry inventories to rebuild, easing market tensions. While the market could significantly tighten in the coming months as OPEC+ production cuts temper the upswing in global oil supplies, the outlook improves over our 2022-28 forecast period. Russia’s invasion of Ukraine sparked a surge in oil prices and brought security of supply concerns to the fore, helping accelerate deployment of clean energy technologies. At the same time, upstream investments in 2023 are expected to reach to their highest levels since 2015. Our projections assume major oil producers maintain their plans to build up capacity even as demand growth slows. A resulting spare capacity cushion of at least 3.8 mb/d, concentrated in the Middle East, should ensure that world oil markets are adequately supplied throughout our forecast period.

Global summary World oil demand reaching peak milestones Growth in world oil demand is set to lose momentum over the 2022-28 forecast period as the energy transition gathers pace, with an overall peak looming on the horizon. Led by continued increases in petrochemical feedstocks, total oil consumption growth will remain narrowly positive through 2028 as usage rises to 105.7 mb/d, 5.9 mb/d above 2022 levels. Crucially, however, demand for oil from combustible fossil fuels (which excludes biofuels, petrochemical feedstocks and other non-energy uses) will hit its apex at 81.6 mb/d during the final year of our forecast. This milestone marks a historic pivot towards lower-emission sources. The slowdown has been hastened by Russia’s invasion of Ukraine amid heightened energy security concerns and by governments’ post-Covid recovery spending plans, with more than USD 2 trillion mobilised for clean energy investments by 2030.

Energy transition gathers pace Policies will reduce road fuel demand and oil use in the power sector The adoption of tighter efficiency standards by regulators, structural changes to the economy and the ever-accelerating penetration of EVs are expected to powerfully moderate annual growth in oil demand throughout the forecast. Road transport demand will rapidly progress towards a post-pandemic peak of 45.3 mb/d in 2025, only marginally above the level of 2019, before embarking on a gradual decline. Globally, road transport oil demand will be 460 kb/d below 2019 levels by 2028. To achieve clear peaks in transport and overall demand, with swift subsequent reductions in use, further policy and behavioural changes will be needed. Gasoline demand will be disproportionately impacted as EVs progressively replace vehicles with internal combustion engines (ICE). About 80% of the 3 mb/d 2022-28 oil demand growth estimated to be displaced by vehicle electrification will be for gasoline. This means that the fuel is likely to exhibit the earliest and most pronounced peak in demand. Usage will never return to 2019 levels and the postpandemic peak could come as early as 2023. Following a brief plateau, the decline is forecast to accelerate from 2026 onwards, with 2028 demand 900 kb/d below that of 2019. Total transport demand will plateau in the second half of our forecast period, with its high-water mark expected in 2026 before ebbing gradually as declines in road use outweigh a continued increase in jet and marine fuels consumption.

Efficiency improvements will occur for all fuels, not only road transport fuels, and will have a larger overall impact on oil demand than EVs. Efficiency gains are expected to reduce the growth in oil demand by roughly 790 kb/d per year over the forecast period, for a total of 4.8 mb/d in avoided growth. Total oil demand savings from new EV sales and efficiency improvements over the 2022-28 period will be 7.8 mb/d. While both fuels will experience large gains over the forecast period, gasoil demand (+620 kb/d) will outperform gasoline use (-250 kb/d) to a considerable extent. In addition to the significance of EVs for gasoline, this is reflective of the relative importance of diesel demand in higher-growth economies.

North American demand is projected to grow by 100 kb/d in 2023 and subsequently decline. Oil demand will shrink by 230 kb/d per year on average over the 2024-28 period on improved fuel economies in passenger cars supported by government policies. Ethane demand, which grew quickly until 2022, will see this trend resume after 2026 as new capacity comes online. Neither the United States, Canada nor Mexico will see oil demand return to pre-Covid levels. Additionally, demand in each of the three countries reaches a post-pandemic peak in 2023. Following a projected increase of 50 kb/d in 2023, European oil consumption is expected to decline by an average of 120 kb/d per year from 2024. By 2028, European oil demand will be 1.4 mb/d below its 2019 level. Gasoil use is seen falling from 2022 onwards, while gasoline growth begins to decline from 2023 as rising EV sales and efficiencies undermine demand.

Supply Global summary Capacity building eases as energy transition accelerates An expansion in global oil production capacity, dominated by the United States and other producers in the Americas, is set to moderate progressively over the medium term. However, the gains still keep up with the slower pace of projected demand growth over the 2023-28 forecast period. The world’s total supply capacity is forecast to post a net increase of 5.9 mb/d to 111 mb/d by 2028, but a marked slowdown in US additions sees overall global capacity growth easing annually from an average 1.9 mb/d in 2022-23 to just 300 kb/d by the end of the forecast. The broad deceleration in production capacity building largely reflects the global pivot towards cleaner energy and a corresponding weaker demand outlook. This creates a spare capacity cushion of an average 4.1 mb/d, concentrated in Saudi Arabia and the UAE, which should help ensure that world markets are adequately supplied throughout the medium term.

Producers outside the OPEC+ alliance (non-OPEC+) dominate medium-term capacity expansion plans, with a net 5.1 mb/d supply boost, or 86% of the total increase. The United States alone accounts for half the non-OPEC+ growth, while Brazil and Guyana contribute an additional 1.9 mb/d in Latin America.

How green is the growth? Oil and gas operations currently account for 15% of the world’s energy-related emissions and the industry is under pressure to play a bigger role in energy transitions. Less than 5% of oil and gas production has 2030 targets that align with the IEA’s NZE Scenario, according to a new IEA report, Emissions from Oil and Gas Operations in Net Zero Transitions. Over our six-year forecast, the world’s oil production is expected to grow by 5.8 mb/d while the Scope 1 and 2 emissions intensity of global upstream oil operations is set to fall by around 15%, leading to an absolute reduction in emissions of 11%.

The United States, the world’s top oil producer, also accounts for the greatest share of emissions from oil operations. Last year it accounted for 16% of global Scope 1 and 2 upstream emissions and 19% of supply. The Biden Administration has put climate action at the top of its agenda with the US Inflation Reduction Act (IRA) and is enforcing policies to mitigate methane emissions, reduce flaring and increase the use of carbon capture, utilisation and storage (CCUS). As a result, we estimate that US upstream oil emissions will drop 40% even as production grows by 13% over the forecast period, mainly through reductions in methane emissions. The Middle East, home to 33% of the world’s current supply and 26% of upstream oil emissions, is forecast to produce 7% more oil in 2028 while generating 4% less emissions. While showing signs of progress, some of the region’s producers such as Iran, Iraq and Qatar have more room to improve than others. In the UAE, the Abu Dhabi National Oil Co (Adnoc) has already committed to a methane intensity of 0.15% by 2025 and to reduce its greenhouse gas (GHG) intensity by 25% by 2030.Saudi Aramco has an extensive leak detection and repair (LDAR) programme that has kept its methane emissions among the lowest in the industry and has a master gas capture system that has led to very high flaring efficiencies.

Tackling Scope 1 and 2 emissions from oil and gas operations is one of the most viable and lowest cost options to reduce total GHG emissions to 2030. Curbing methane emissions from upstream operations represents one of the best opportunities given the large scope for cost-effective abatement through policies aimed at LDAR and stricter equipment design. Limiting non-emergency flaring and electrifying operations can also play large roles in reducing emissions. The exact path of emissions reductions will depend on policy decisions and industry responsiveness. Yet, the decarbonisation of oil and gas operations is needed and must be part of energy transitions. The industry also needs to adopt a consistent approach to monitor, report and verify emissions from its activities based on robust measurements to build public confidence in actions being taken.

Global oil supply growth concentrated in the Americas The outlook for actual supply growth, as opposed to capacity, shows the United States, along with Brazil and Guyana, dominating gains, accounting for 80% of the increase over the forecast period. To match our projected oil demand growth over the next six years, an increase of 5.8 mb/d would be required for supply to reach 105.7 mb/d by 2028. Under this forecast, the United States alone provides nearly 45% of the total rise while the Middle East accounts for just over 40%. Collectively, OPEC+ contributes 12% of the growth as declines from Russia and African members temper gains from Middle East countries. Driven by the United States and other countries in the Americas, world oil production will overtake pre-Covid-19 levels this year and continue its upward trajectory in the medium term. The United States, Brazil and Canada are all forecast to pump at unprecedented rates this year and the trio is expected to set fresh records through 2028. Qatar hits its highest ever output towards the end of the medium-term period. Saudi Arabia and the UAE, constrained for now by OPEC+ quota cuts that came into effect from November 2022 and voluntary curbs from May 2023 that are due to run through 2024, are expected to produce at historical highs in the later years of the forecast. Russia, under the weight of sanctions, posts the biggest loss over the six-year period, while underinvestment leads to notable declines in Mexico and Angola.

Supply in 2023 is forecast to rise by 1.4 mb/d to reach a record-high annual average of 101.3 mb/d. But that is a sharp slowdown from growth of 4.5 mb/d in 2022, which was dominated by the OPEC+ alliance as it phased out historic 2020 cutbacks. By 2028, the supply expansion edges down to just 390 kb/d – in line with a deceleration in oil demand due to continued progress in energy efficiency and the uptake of electric vehicles. The slowdown in US growth will enable producers from the Middle East – led by Saudi Arabia, Iraq and the UAE – to add barrels to meet demand growth. As a result, market share from the region rises to 32% in 2028 from 30% in 2023. Given current investment and market trends, the Middle East’s share of world oil production looks set to increase over the longer term.

Conventional discoveries slow as exploration bifurcates In 2022, improvements in oil market conditions led to the sanctioning of projects that are expected to add 1.6 mb/d to global production by 2028. Brazil accounts for 20% of the sanctioned volumes, while the United States and Guyana each contribute 14% and Saudi Arabia provides 12%. The Brazilian gains come primarily from Mero and Búzios, two large multi-phase projects eventually comprised of 15 floating production storage and offloading vessels (FPSOs) between them. In Guyana, the ExxonMobil-led project will commission four new FPSOs adding close to 800 kb/d of output. Projects in the deepwater Gulf of Mexico (GoM) and the Pikka project in Alaska support the US gains.

The investment cuts affected exploration spend more acutely than other business segments. As a result, conventional oil discoveries in 2021 fell to their lowest since 2016, with less than 5 billion barrels found – nearly matching a 50-year low and half the annual average seen over the previous decade, according to Rystad Energy. In 2022, discoveries recovered marginally, to 6 billion barrels, but are still a far cry from historical averages. The effects of lower exploration spend on global supply output have been muted over the past decade as the growth of non-conventional production – accounting for 130% of the world’s total growth over the period – more than offsets declines in conventional oil production.

Iran supply edges up, but sanctions stymie capacity growth Iran remains a wildcard for world oil markets. If it is released from sanctions, production could ramp up gradually by roughly 900 kb/d to reach capacity of 3.8 mb/d. Talks to revive the 2015 Iran nuclear deal, which would ease sanctions, have been on ice since September 2022. However, reports recently have emerged suggesting the potential for some sanctions relief for Tehran.

Despite tough financial restrictions, Iran managed to increase crude oil output by about 130 kb/d in 2022 to an average 2.5 mb/d. Tehran appears to be keeping up brisk oil sales to China that have been running at an estimated 1 mb/d since the third quarter of last year. Before the former US administration withdrew from the Joint Comprehensive Plan of Action nuclear deal (JCPOA) in 2018, exports of Iranian oil, including condensates, had been running above 2 mb/d. Higher exports and domestic throughput have pushed Iranian crude production up to around 2.9 mb/d in May 2023 and we have held that level throughout the remainder of the forecast period.

Shale growth at risk from lower prices, higher costs The reaction of shale production to different prices is critical to markets as it has been a swing producer alongside OPEC+ in balancing markets over the last eight years. Yet, the responsiveness of the US shale industry vis-à-vis pricing has changed in the wake of the Covid-19 pandemic (see November 2021 Oil Market Report). This was especially true in the summer of 2022 when prices surged but activity levels continued along their same trajectory. Equipment availability, lower reinvestment rates, productivity challenges and increased costs have squeezed the industry’s ability to respond and skewed risks to the downside. While West Texas Intermediate (WTI) at USD 75/bbl is still sufficient to cover operating expenses even for the lowest quartile of operators in the Permian Basin, for many companies it is very close to threshold pricing for drilling new wells. After almost consistently falling since 2015, wellhead breakeven prices rose last year and are, so far, on track to log a second year of increases. Wellhead breakeven prices for shale in key basins are, on average, USD 14/bbl lower than half-cycle breakeven costs.

For modelling purposes, this report assumes that 30% of production is more responsive to forward strip pricing with the other 70% less price responsive due to hedging programmes, long-term corporate planning or other factors. That, coupled with production efficiency and multi-year correlations of completion activity to margins, forms the basis of our forecast.

Expected increases in Canada’s carbon tax will reduce growth in supply as operators assess higher investment costs. The proposed carbon tax could jump from around USD 30/tonne currently to approximately USD 135/tonne by 2030. The Royal Bank of Canada estimates the industry will need to spend USD 10.5 billion annually until 2050 to reach net zero emissions while the Canadian Association of Petroleum Producers believes it will need to spend closer to USD 75 billion in total to achieve the goal. The size and range of these numbers highlights the challenge and uncertainty involved in reaching net zero.

Brazil, Guyana, Argentina underpin Latin America growth Total oil supply in non-OPEC+ Latin America grows 1.9 mb/d to 7.5 mb/d by 2028 as low-cost resources tapped in Brazilian offshore pre-salt reservoirs, the Stabroek block in offshore Guyana and the Neuquén Basin in Argentina’s offset declines from the rest of the region. Brazilian supply rises 970 kb/d by 2028, with Petrobras expected to contribute more than 70% of the increase. Other gains will come from TotalEnergies, Shell, Equinor, China National Offshore Oil Corporation (CNOOC) and China National Petroleum Corporation (CNPC) as IOCs and other NOCs expand their footprint in Brazil’s prolific offshore. The Santos Basin currently produces 70% of Brazil’s crude and is where the major projects and expansions are slated to occur over the forecast period. With a base production decline rate of between 10-15% per year, any significant project delays or operational issues could put Brazil’s projected growth at risk.

Refining capacity East of Suez refining capacity migration accelerates More than 6 mb/d of new crude distillation capacity is scheduled to be completed over the forecast period. At the same time, 1.6 mb/d of capacity is slated to shut, leaving a 4.4 mb/d net increase. East of Suez dominates the outlook, though the Atlantic Basin will see modest increases early in our forecast. A number of additional projects are in the planning phase, but we have excluded those that appear to lack the sufficient financial, organisational, or governmental support needed to be operational by 2028. Approximately 3.9 mb/d of crude distillation capacity was closed in 2020-22, more than double the prevailing five-year average rate and well ahead of historical trends. The latest round of shutdowns following the Covid demand shock in 2020-21 are now largely complete and gross additions outpace closures by a healthy margin for the next three years.

Nevertheless, a further rationalisation of refinery capacity may be necessary in OECD Europe and OECD Americas. Both regions see a decline in demand for gasoline and road diesel before the end of the forecast. Furthermore, refiners in Europe are disadvantaged by inflated natural gas and electricity prices and stringent environmental policies, in particular the Emissions Trading System (ETS).

The commissioning of 1.8 mb/d of new refining capacity in the Atlantic Basin stands in stark contrast to the longer-term trend for capacity closures. However, this shift is a temporary reprieve and reflects the start-up of two world-scale refineries in Nigeria (650 kb/d) and Mexico (340 kb/d), plus the expansion of ExxonMobil’s Beaumont refinery (+250 kb/d) and the completion of the second train of the RNEST refinery in Brazil. (+115 kb/d).

After the onset of the pandemic and a sharp decline in global product demand, the refining industry was pushed into turmoil resulting in a record wave of shutdowns. Refinery rationalisation removed 3.9 mb/d of capacity over the three-year period from 2020 to 2022. Furthermore, many new-build projects were delayed by contracting problems and logistical issues.

Regional developments Americas refining capacity posts marginal gains The United States lost its position as the world’s largest refiner by installed capacity in 2022 due to the rapid rise in new Chinese refinery builds. However, the United States is still expected to process more crude than China until 2024, before being overtaken in the subsequent years. US throughputs in 2028 are seen 750 kb/d lower than in 2022, and 1.8 mb/d below the pre-Covid 2018 peak due to refinery closures in recent years. The United States shale revolution, combined with the ban on crude exports in place until the end of 2015, triggered a mini-boom in refining capacity, with new additions between 2014-2023 totalling 840 kb/d, from both greenfield projects and expansions. However, ExxonMobil’s Beaumont refinery build-out, which came online early in 2023, is likely to be the last major project in the United States.

Nevertheless, challenges lie ahead for the region. North American demand growth is the most severely impacted by shift to EVs and efficiency improvements. Regional gasoline contracts by 1 mb/d between 2022 and 2028. If measured against the pre-Covid demand peak, the cumulative loss is 1.6 mb/d. Diesel/gasoil use is also forecast to decline by 400 kb/d over the forecast period.

East of Suez crude oil balances As the driver of future oil demand growth, East of Suez will fundamentally shape global crude balances. Baseload supply has extended from the existing Middle East flow to incorporate the near totality of Russian crude exports since 2022. Yet, still more volumes will be needed by China, India and other regional refiners in the coming years. The Atlantic Basin producers will provide increasing swing supply volumes to meet month-to-month changes and annual growth in Asian refining. This was already the case for flows from West Africa and Northwest Europe (including Baltic Urals cargoes) to refiners in Asia. It will be increasingly so now.

Middle East crude and condensate exports rose to 18 mb/d in 2022, about 1 mb/d below their recent peak in 2018. Production cuts and the start up of new refinery capacity in 2023 will limit regional exports through 2028, with a notable impact on heavier sour grades. After falling 700 kb/d y-o-y in 2023 due to lower targets and voluntary reductions by OPEC+, Middle Eastern crude production will increase through the forecast period while crude used in power generation falls by 200 kb/d to 600 kb/d in total. Together, these contributions lift exports to back to around 18.5 mb/d as in 2022. Part of the rebound in flows will go to feed new refinery capacity owned fully or partially by national oil companies in the Middle East, further constraining exports available to refiners in crude importing countries. The region’s condensate surplus rises by an estimated 250 kb/d to 1.2 mb/d from 2022 to 2028 as a boost to production offsets an increase of 190 kb/d in splitter activity.

Fuel oil balances and trade: East offers a permanent sink to Russia Fuel oil balances reflect the drivers in two key regions. Russia remains the principal source of fuel oil exports while Other Asia, notably Singapore and Korea, dominates fuel oil imports to meet bunkering requirements. This changes very little over the course of the outlook as the shipping industry has made only limited progress in developing alternatives for bunkering while major upgrading projects to reduce fuel output at Russian refineries have largely been completed or put on hold. However, since March 2022, Russian exports shifted entirely to the east, requiring increased flows from East of Suez to balance the Atlantic Basin. Middle East exports develop as local refinery capacity grows faster than demand.

Source:http://IEA