Crude Oil at $60? Wait Five Years, Says Latest OPEC Outlook

As U.S. voters head to the polls to determine the 45th President of the United States, oil prices were volatile on Tuesday.

Benchmark Brent crude and West Texas Intermediate were both down approximately 0.5%, trading at around $45.91 and $44.65, respectively, at 9 a.m. Prices continued falling but rebounded in midday trading, with WTI up 0.51% to $45.12 and Brent up 0.09% to $46.19.

While the election results won't be final until the end of day at the earliest, the Organization of Petroleum Exporting Countries (OPEC) says the oil market reached a turning point this year toward a more balanced market, despite recent volatility. Furthermore, medium-term oil demand is forecast to increase to 99.2 million barrels per day (mb/d), but long-term demand is expected to reach 109.4 mb/d, a downward revision of 0.4 mb/d to OPEC's prior estimates as the cartel anticipates tightening energy policies and alternative energy growth.

It's no secret that oil prices have been unstable this year, as OPEC outlined in its 428-page World Oil Outlook report. Beginning in January, the OPEC Reference Basket (ORB) "reached its lowest level ($22.48/barrel) since the price decline that started in the second half of 2014." Since then, it has fluctuated in the $40 to $45 per barrel range. Yet, the organization says demand of approximately 1.2 mb/d "remains relatively healthy."

Looking toward the medium term (2021), OPEC expects prices to recover and reach $60 a barrel by 2021 (or $65/b in nominal terms), with an outlook of $92 a barrel by 2040 (in 2015 dollars), "which is equivalent to $155/b in nominal terms."

However, given the outlook, OPEC says there is a "need for significant investments" as there has been a drop off over the past two years. In upstream oil alone, capital expenditure declined by more than $130 billion in 2015 compared to 2014. For 2016, the decline is expected to be less than $80 billion.

"Overall, the outlook sees oil-related investment requirements of around $10 trillion over the period to 2040," the report read. "In this regard, it is important to remember that the short-, medium- and long-term time frames are all linked."

OPEC says upstream oil requires investments of $7.4 trillion over the 24-year period, the midstream sector needs about $1.1 trillion of investments, while the downstream sector, refinery investments are estimated at about $1.5 trillion.

However, by 2040 energy will see progress in renewable and nuclear energy, creating a growth that will outpace gas, coal and oil.

"Currently, fossil fuels -- namely, oil, gas and coal -- account for 81% of the global energy mix," the report stated. By 2040, though, fossil fuels will account for 77% of total energy demand. The largest gains, in terms of non-fossil fuels, are expected in the "Other renewables" and "Nuclear," as seen from the chart below.

Source: World Oil Outlook 2016, Organization of the Petroleum Exporting Countries
Source: World Oil Outlook 2016, Organization of the Petroleum Exporting Countries

"The shift away from coal towards gas and renewables in power generation is not surprising as policymakers are increasingly engaged in climate change mitigation initiatives," the OPEC report says.

This is concurrent with the thinking of at least one major oil CEO.

ExxonMobil (XOM) outlined the energy outlook, and expects significant growth in renewable energy and nuclear power between 2016 and 2040. And, given that Exxon is the world's largest energy company by market cap, oil and gas reserves, refining capacity and operates in most countries around the world, it's perspective is often reflective of the world outlook.

"In 2040, oil and natural gas will likely be nearly 60% of global supplies, while nuclear and renewables will be approaching a 25% share."

One of the biggest catalysts for change will be the future car fleet as natural gas vehicles, hybrid electric vehicles, plug-in hybrid electric vehicles, battery electric vehicles and fuel cell vehicles will play an "increasingly role."

OPEC estimates that so-called non-conventional powertrain passenger vehicles will represent 22% of the passenger car fleet by 2040, only a 3% increase from 2014, but battery electric vehicles will likely represent the most growth. By 2040, OPEC anticipates about 2.1 billion passenger cars, double the amount on the road in 2015.

Importantly, the organization highlighted the need to meet this demand. Given that OPEC sees non-OPEC supply declining between 2016 and 2017 and then rising until a peak of 61.4 mb/d in 2027. To OPEC, this means that the cartel "will be required to meet most of the additional long-term oil demand."

But before OPEC can address those long-term demands, they must first finalize and implement the decision reached in Algiers earlier this year, in which the 14 members opted for a production target ranging between 32.5 and 33 mb/d, "in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing further forward."

While OPEC Secretary General expressed confidence this week that the cartel will be able to get a deal done by Nov. 30, others are not as optimistic.

"I give OPEC a 40% chance of reaching an agreement on Nov. 30 and, if they do, everyone will cheat," said Pioneer Natural Resources (PXD) CEO Scott Sheffield, highlighted in a recent Jefferies research note. "I've seen this over my 42-year career. The market will not balance until 2018."

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