An oil shock might be lurking around the corner as the price bust has hammered investment in future supply, according to the International Energy Agency.
“Historic” investment cuts taking place now increase the chance of oil-security surprises in the “not-too-distant” future, Neil Atkinson, head from the IEA’s Oil Industry and Markets Division, said in Singapore on Wednesday. About US$300 billion is required to sustain the present degree of production, and nations including the U.S., Canada, Brazil, and Mexico are facing difficulty to keep up investments, he explained.
“We need a lot of investments just to stand still,” Atkinson said at the launch event of SIEW 2016. “There’s danger as we are reaching a point where we’re barely investing upstream. If investment doesn’t resume in 2017 and 2018, we are able to see a spike in oil prices as oil supply can’t meet demand.”
Companies from ConocoPhillips to Chevron Corp. and BP Plc have cancelled a lot more than US$100 billion in investments, let go thousands of workers, slashed dividends and sold assets as oil sank below US$30 a barrel to a 12-year low. With crude rebounding since mid-February to close US$41, Atkinson said the worst may be over for prices because they possess a floor “for the time being.” The business of Petroleum Exporting Countries and other producers including Russia intend to meet in Doha next month to go over limiting output to reduce a worldwide oversupply.
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No Impact
“The meeting may or may not occur,” said Atkinson. It’s seen as an gesture to show that there’s stability and the impact it’ll have on actual supply structure is going to be “none whatsoever,” said Atkinson, who expects oil prices to average US$35 to US$40 a barrel this year.
West Texas Intermediate oil for May delivery lost around 58 cents US to US$40.87 a barrel on the New York Mercantile Exchange and what food was in US$41.01 at 6:36 p.m. Singapore time. Prices, that have declined for 2 years, may have passed their lowest point as shrinking supplies outside OPEC and disruptions within the group erode the global surplus, the IEA said in the monthly market set of March 11.
“You have to invest large sums of cash just to maintain existing production and if you want to grow production to satisfy the demand growth that we’re expecting, those funds needs to originate from somewhere and we’re seeing big cuts,” Atkinson said in a separate interview in the event. The IEA began following the oil crisis of 1973-1974, initially to assist countries co-ordinate a collective reaction to major disruptions within the supply of crude, according to its website.
Market Balance
U.S. crude stockpiles are at 523.2 million barrels, the highest level since 1930, based on data in the Energy Information Administration. Demand and supply will move closer to balance in the other half of this year, according to Atkinson.
The oil market is going to be balanced in 2017 and stockpiles will fall from 2018 to 2021, Atkinson said. Global demand will grow 1.2 per cent annually in the five years to 2021, in contrast to 1.7 percent annual growth in 2009 to 2015, he said.
There will be “barely any supply to satisfy demand” if investments don’t resume in the next one or two years, said Atkinson. Apart from Saudi Arabia and something or two other Gulf state nations, there is little spare capacity all over the world, he said.
The risk of supply outages for example those in Nigeria and Iraq are “episodic” events because of political instability, something which may also affect other countries around the world as a result of low oil prices, based on Atkinson. Further ahead, Venezuela’s economic problems can lead to social and political unrest and the potential for supply disruptions in Libya remains a risk, he explained.
Bloomberg News
