Oil prices plunge won't last much longer - IEA
The International Energy Agency said that the rapid slide in oil prices over the last 9 months won’t last much longer but the rebound will be limited and won’t feature prices at the heights of the last 3 years.
The crude market succumbed to a steep selloff last year amid booming production in North America and sluggish global demand. Prices have fallen more than 50% since June, prompting a wave of spending cuts among oil producers and a sharp decline in the number of rigs drilling for crude in the US.
The IEA, a Paris-based energy watchdog, said that those shifts should start to have an impact on oil prices as soon as the H2 of the year, as American oil drawn from shale formations is proving responsive to the market slump.
Mr Antoine Halff, head of the IEA’s oil industry and markets division, said that “We’re looking at a contraction in the US. We’re looking at a supply increase which is probably 300,000 barrels a day less than would have been expected prior to the price decrease.”
Though the Paris-based agency said downward pressures on the market have yet to run their course, a sharp increase in oil storage prompted by ample supply could grind to a halt as soon as the middle of the year and the market is expected tighten through 2016.
In its most recent analysis, which takes a 5 year view of the oil market, the IEA forecast that global oil supply will grow by just 860,000 barrels a day to 2020, compared with an increase of 1.8 million barrels a day in 2014.
However, the slowdown in US shale oil output is expected to be short-lived as prices rebound, with more conventional oil producers like Russia suffering more in the medium-term.
The IEA said that “The price correction will cause the North American supply ‘party’ to mark a pause; it will not bring it to an end.”
From 2017, the IEA expects US shale oil to come back sharply, stimulated by a recovery in prices. It forecasts supply will rise to about 5.2 million barrels a day in 2020 compared with 3.6 million barrels a day in 2014.
The swift return of US supply growth would likely limit any sharp increase in prices as markets tighten over the coming years, marking a significant departure from boom-and-bust patterns seen previously in the oil market.
Mr Halff of the IEA said using a technical term for shale oil that “We’re in a situation where light, tight oil supplies a floor in a downturn because it’s quick to respond but then you see it’s as quick to respond on the rebound and provides a bit of a ceiling on prices.”
The role the IEA expects shale oil to play in rebalancing the oil market signifies a dramatic shift in the role played by the Organization of the Petroleum Exporting Countries. OPEC has traditionally acted as the swing producer, increasing output when supply seemed tight and cutting production in periods of oversupply.
However, the producer group roiled the market in November when it opted to defend its market share, rather than cut output to shore up prices, abandoning its traditional role and sending prices into a tailspin.
The economic impact of lower prices on OPEC has been severe, but in terms of market share it is already paying dividends. OPEC said that demand for its oil will increase to 29.2 million barrels a day this year. That is still below the group’s output quota of 30 million barrels a day but a significant upward revision from previous forecasts.
Longer term, the IEA expects the oil cartel's defensive strategy could prove more effective. Though US shale output thought by many to be a target of OPEC’s defensive policy will remain a major source of new oil supply at the end of the decade, demand for OPEC’s oil will also increase as other sources of non-OPEC supply take longer to recover from lower prices.
The IEA forecasts demand for OPEC’s oil will start rising in 2016 and reach 32.1 million barrels a day by 2020, 2.7 million barrels a day above demand in 2014.
Source - The Wall Street Journal