HOUSTON, TX — Rising Canadian and U.S. production will not be enough to make up for tepid global investment, leading to a supply shortage in oil markets in a few years, a report published Monday said.

In its annual five-year forecast released in Houston Monday, energy watchdog Paris-based International Energy Agency said “it is far from clear that enough projects will enter the pipeline in the next few years to avoid a potentially tight market by 2020 and with it, the possibility of a price spike.”

The report comes as major oil and gas producers continue to slash their exploration budgets amid lower oil prices. Years of sharply growing oil supply have put the market into a state of oversupply in recent years, depressing prices. That led to widespread retrenchment on the part of debt-laden major oil producers. Late in 2016, OPEC and its non-OPEC allies agreed to curb supplies in an attempt to put oil markets closer into balance.

Investment in upstream oil and gas development plummeted 25 per cent in 2015, and another 26 per cent in 2016.

Canada will remain one of the largest contributors of new supply over the next five years, as oilsands expansion projects that were commissioned years ago begin to come online — but its product will remain deeply discounted.

The IEA has pegged Canadian production growth at around 800,000 barrels per day by 2022, putting total production at 5.3 million bpd, up from 4.5 million bpd in 2016.

That growth will come mainly from the oilsands. New projects coming online include Suncor Energy Inc.’s Fort Hills oilsands mine; ConocoPhillips Co.’s expansion of its Surmont steam-driven project; Cenovus Energy Inc.’s Foster Creek expansion; and Canadian Natural Resources Ltd.’s Horizon expansion.

But pipeline constraints will lead to a rise in oil-by-rail shipments out of Canada, the report added. The number of barrels moving by rail car could spike from 80,000 bpd in 2016 to as much as 520,000 bpd this year, the report said.

The IEA warned that differentials between Western Canada Select, a Canadian heavy oil benchmark, and West Texas Intermediate will begin to widen as Canadian producers are forced to offer a discount.

“With rail shipments set to rise, producers in Alberta will have to offer a discount to WTI and other crudes such as Mexican Maya, which can be shipped to the US Gulf Coast for a few dollars a barrel,” the IEA said in its report.

Canadian heavy oil producers have in the past sold their product at a discount to other heavy oil grades, including Mexican Maya, a heavy oil benchmark, due to shipping constraints.

The energy watchdog said reliance on U.S. markets and associated transport costs will likely keep the pressure on Canadian crude prices.

“As such, a diversification of export outlets and spare transport capacity is desirable. Otherwise, Canada might face restricted access to markets where the highest growth in crude oil demand is concentrated –namely Asia,” the ageny said.

Apart from Canada, the United States will also see an estimated 1.6 million bpd of new supply over the next five years, and Brazil, at 1.1 million bpd.

Production costs have also continued to come down amid lower prices. Globally, costs have fallen by 15 per cent in 2015 and by 17 per cent in 2016.

Light tight oil producers in the U.S. have seen a particularly sharp drop in costs, falling 30 per cent in 2015 and 22 per cent in 2016, according to the report.

Meanwhile, demand is expected to grow year-over-year despite unpredictable supply.

“On the demand side, we see less uncertainty: growth will continue, driven mainly by Asia,” the report said.

Global oil demand grew by two million bpd in 2015, the largest year-over-year growth in five years.

The IEA report expects global oil demand to continue to grow at roughly 1.2 million bpd per year to 2022, possibly dampening recent forecasts that suggest oil demand would peak in as little as five years.

India has long been considered the main driver of global demand, as the country’s population is set to spike in coming years. China, meanwhile, has seen relatively slower GDP growth and population growth recently.

Demand growth of 1.2 million bpd per year would propel total global oil consumption over 100 million bpd around 2020, rising to 104 million bpd in 2022. Today international oil consumption stands at around 97 million bpd.

Jsnyder@postmedia.com