PARIS: Oil prices will remain low at least until next year, the International Energy Agency (IEA) warned on Monday (Tuesday in Manila), saying any 2017 recovery will be slow as massive oil stocks feed into the market.
“We must say that today’s oil market conditions do not suggest that prices can recover sharply in the immediate future—unless, of course, there is a major geopolitical event,” the IEA said in its medium-term report, which looks five years ahead.
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices when the market, having balanced, then starts to draw down those stocks,” it said.
“While oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies,” the report said.
The IEA acknowledged that predicting the oil market “is today a task of enormous complexity,” saying experts were still grappling with the implications of a dramatic drop in the oil price from over $100 per barrel in July 2014 to around $30 today.
A year ago, analysts predicted that oil oversupply would end by late 2015, “but that view has proved very wide of the mark,” it admitted.
US shale production squeezed
The IEA’s view is that supply will eventually be curtailed as investment cuts prompted by low prices translate into lower output.
Spending on oil exploration and equipment is projected to drop by 17 percent this year after a 24-percent cut in 2015 “which would be the first time since 1986 that upstream investment has fallen for two consecutive years,” the IEA noted.
The low oil price is already squeezing profits at higher-cost producers, and the IEA said it expects the production of US light tight oil (LTO), also known as shale, to fall back by 600,000 barrels per day and by a further 200,000 per day next year before a gradual recovery in oil prices pushes production up again.
Worldwide demand for oil, meanwhile, will continue to increase, but at a weaker pace amid financial market turmoil and clear signs that “almost any economy you care to look at could see its GDP growth prospects downgraded.”
Global annual average demand growth over the next five years is expected at 1.2 mb/d, down from a 1.6 mb/d increase seen in 2015 when demand received an initial boost from oil price falls.
But while the current supply/demand mix is keeping a lid on prices, the current slashing of investment in oil producing facilities may well hit the market with bottlenecks further down the road, possibly leading to abrupt price spikes, the IEA warned.
Only Saudi Arabia and Iran have any spare production capacity left, and other countries are not investing enough even to keep current production going, let alone meet demand growth over coming years.
“The risk of a sharp oil price rise towards the later part of our forecast [around 2021]arising from insufficient investment is as potentially de-stabilizing as the sharp oil price fall has proved to be,” the IEA warned.
But in the short term, the IEA said that OPEC members had shown their “determination” to maintain and expand their market share and that rising oil production from Iraq and Saudi Arabia last year would now be joined by Iran in the wake of a deal with western powers to lift sanctions.