Future falling oil supply risks being overlooked: HSBC
HSBC warns we are not paying enough attention to the falling oil supply in the future, but rather the oversupply at present. The report states that oil's oversupply problem will end by 2017 with the market returning to balance; spare capacity will have shrunk significantly, thereby making the markets more susceptible to disruptions, noting that 81% of production of liquid oil is already in decline and the amount of new oil discoveries being made is small. HSBC calculates that by 2040 the world will need to find around 40 million barrels of oil per day to keep up with the demand of emerging economies - the equivalent of over four times the current crude oil output of Saudi Arabia. Though there is potential growth for US shale oil, it currently only represents 5% of global supply.

Art designer Riccardo Zanobini takes a oil barrel to weld at his headquarters in Massa Lombarda, near Imola, central Italy June 25, 2013. Young designers from Vibrazioni Art Design use oil barrels from different industrial sectors, from petrochemicals to food containers, to create products like furniture and lighting. Despite the economic crisis in Italy, the company, established in 2007, exports to Asia and Europe. Reuters/Stefano Rellandini

In the current climate, the vast majority of worry in the oil markets surrounds the huge imbalance in supply and demand in the industry. This is understandable, given that the enormous glut of oil in the markets has pushed prices down from more than $100 around two years ago, to less than $50 right now.

However, in a major new research note, HSBC argues that soon we won't be worrying about there being too much supply and not enough demand, but rather, things will be the other way round soon enough, and that is going to cause huge problems.

In the report from HSBC staff Kim Fustier, Gordon Gray, Christoffer Gundersen, and Thomas Himboldt argue that given the finite nature of the physical amount of oil in the world, people should really be paying more attention to falling supply in the future, rather than oversupply right now.

Here is the extract from Fustier et al (emphasis ours):

"Given the backdrop of the past two years’ severe oversupply in the global oil market, it’s not surprising that few are discussing the possibility of a future supply squeeze. Indeed, most of the current debate on the long-term outlook for oil seems focused on risks to demand from progress on both the policy and technology fronts.

"Meanwhile, we expect the past two years’ severe crude price weakness to result in a return to balance in the global oil market in 2017. At that stage, we expect global effective spare capacity to fall to as little as 1% of demand. Supply disruptions have had only limited impact on price in 2015-16 due to the global oversupply, but the market will be much more susceptible to interruptions post-2017. In addition, given the almost unprecedented fall in industry investment since 2014, we expect the focus to return to the availability of adequate supply."

HSBC's note is more than 50 pages of detailed, thoughtful research on the state of the markets and how the dwindling availability of oil, along with jumping demand over the coming decades will change the world.

But included within the report is a helpful, ten-point summary of the key arguments the bank makes, and what is going on right now. We have summarised the arguments below:

Here is the chart showing the decline in production post-peak:

HSBC

All these concerns combined, HSBC argues, means that we should be less worried about the current tilting of the oil market to oversupply, and more towards the coming decline in supplies. It may not hit us for a while, but it is a looming crisis that the oil industry must face.