The 30% fall in oil prices since mid-June continues to dominate the oil market headlines, and anyone hoping for a swift recovery in prices could well be disappointed — especially if the most recent forecasts from the International Energy Agency are anything to go by.
The west’s energy watchdog said on Friday that global oil prices could continue to fall into 2015 despite the expectation that some unconventional oil production could become uneconomic at prices under $80/b.
The IEA went as far to say that oil markets were entering a “new chapter” in their history, and that a return to higher prices in the short term seemed unlikely.
“Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015,” the Paris-based agency said.
This week, Brent crude futures slipped below $80/b for the first time in more than four years, and earlier Friday dipped below $77/b.
“While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80-$90/b range, supply/demand balances suggest that the price rout has yet to run its course,” it said.
Market players have estimated that some US light, tight oil production could become uneconomic at current price levels, including OPEC Secretary General Abdalla el-Badri, who last month said 50% of US light, tight oil production could come off the market as a result of the low price.
That has been dismissed by others, including some of the US producers themselves and majors such as ConocoPhillips.
The IEA, too, doesn’t think there will be a significant impact.
“While falling prices may well trim investment in US light tight oil, such potential cuts should not be misconstrued as a production drop, and indeed would likely pale in comparison with recent gains in LTO productivity,” it said.
“Cost reductions and efficiency gains in LTO production have been constant, and price pressures would only provide more impetus for producers to cut costs further.”
In other words, the US shale boom is not going away, and unless there is supply disruption elsewhere in the world, it is hard to see where any upward price correction could come from.
So, the IEA thinks this represents a permanent shift in oil market dynamics.
“Economic development no longer spurs oil demand growth as it once did, especially in the absence of wage gains. China, the top source of incremental oil demand in recent years, has entered a less oil-intensive stage of development, while years of high prices have let innovative technologies unlock untold resources in North America and likely soon elsewhere,” it said.
“The steeper they are, the less sustainable oil price swings tend to be. But a return to previous price highs may not be a close prospect, as it is increasingly clear that we have begun a new chapter in the history of the oil markets.”
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