Annual growth in oil demand could average 1.2 million barrels per day (mb/d) between now and 2016, while natural gas demand could grow by around 500 billion cubic meters – around 2.5 times Russia’s current gas exports – during the same time, according to the IEA’s Medium-Term Oil and Gas Markets 2011.

The report, launched today at the St. Petersburg International Economic Forum, seeks to make sense of the increased divergence in oil and gas markets by providing a comprehensive outlook for fundamentals through 2016.

“This report shows that oil’s twilight as an industrial fuel continues, and it becomes ever more concentrated in the transport and petrochemical sectors,” said International Energy Agency Executive Director Nobuo Tanaka. “Gas on the other hand continues to increase in power generation as well as industry and space heating. In terms of market structure and pricing, oil is a genuinely global commodity, while gas markets, although globalising, remain bound by some key regional constraints, not least in terms of transportation.”

For oil, the projections are based on prevailing futures prices, which form an assumption as opposed to a price forecast. The crude price assumption used in the outlook averages $103 per barrel, or around $20 more than in last year’s MTOGM. Based on this assumption, the report projects the following outcomes in oil markets:

- Growth in oil supply capacity through 2016 averages 1.1 mb/d annually, as higher prices unlock new supplies. Iraq, UAE and Angola lead growth prospects from OPEC, while Brazil, Canada, Kazakhstan and Columbia drive non-OPEC increases. Conventional crude oil accounts for less than 40% of the increase, while natural gas liquids, biofuels and unconventional oil from onshore the United States account for the lion’s share of new supplies;

- While spurring investment in exploration and development, higher oil prices threaten to weaken economic growth and curb demand. Accordingly, the report presents both a base case scenario in which demand reaches 95.3 mb/d in 2016 and a low-GDP variant in which demand is 2.4 mb/d lower by 2016;

- In both demand scenarios, China, Asia and the Middle East together generate around 95% of net growth, with buoyant gasoil/diesel growth and major increases expected from the transport and petrochemical sectors. Persistent end-user subsidies and buoyant economic growth allow non-OECD demand growth to stay robust, despite high international crude prices;

- In the base case scenario, increasing oil supply could match oil demand growth with spare capacities maintained near current levels, assuming geopolitical risks in oil-producing countries do not affect their ability to supply oil markets.

- In the lower GDP scenario, lower oil demand could generate some breathing space in terms of higher OPEC spare capacity, but much depends on sustained investment to ensure new supplies can be brought to market at a pace that matches expected demand growth.

The report also examines recent thinking on the debate about causes and remedies for oil price volatility, noting that neither volatility nor speculative activity appear out of line with historical levels. It discusses the feedbacks between exchange rates and crude oil prices, and itemises some of the problems facing derivatives market regulators as they grapple with minimising systemic risk and potential market manipulation.

The report makes the following projections for the gas market:

- As gas consumption grows by 2.4% per year between now and 2016, gas continues to increase its share of the global energy mix. Non-OECD markets are not only the main driver behind this demand growth but also contribute to 90% of additional supplies;

- Global trade in gas expands rapidly as more countries become gas importers. Natural gas joins oil, iron ore and many others in the club of commodities in which China is the increasingly dominant source of demand. Around one third of global demand growth comes from China. China emerges as one of the biggest importers of pipeline gas as well as LNG, while rapidly increasing its domestic production at the same time;

- Australia emerges as one of the leading LNG exporters, rivalling Qatar. Australia remains a testing ground for pioneering technologies like coalbed methane and floating LNG, and becomes the key source of gas for growing demand in the Asia-Pacific;

- In the United States, the shale gas revolution – already in full swing – continues. As domestic gas drives out imported LNG, North America is a segmented “island” market where low prices stimulate demand, especially in power generation and the chemical industry;

- On the other hand, in Europe and the Asia-Pacific, oil indexation still remains relevant despite the increasing liquidity and efficiency of gas trading hubs. Increasing gas demand and depleting domestic resources in Europe will lead to growing European dependence on a small number of exporting countries;

- Nevertheless, the globalising LNG trade plays an increasingly important role of linking regions and reacting to supply/demand disturbances.