by | Feb 24, 2017 | News

Inevitable Sharp Rise in Oil Prices: Brace for an Upward Spike

The International Energy Agency has warned that unless the exploration firms embark on new upstream projects, there will be a drop in OPEC’s spare capacity resulting in a sharp rise in oil prices.

A recent report from the International Energy Agency has stated that three years of sudden cuts to upstream spending as a result of low oil prices could cause insufficient supply of oil in three years’ time. The IEA also estimated that in 2014, when that there was a drastic reduction in oil prices, oil producers quickly adjusted by reducing their spending. In 2015, there was a drop in oil and gas investment, while in 2016; investment in the sector further dropped by additional 26%. Numerous projects were put on hold as a result of this.

Since it takes time to develop many of these projects, there could be new supplies hitting the market at the end of the decade due to the sharp slowdown that occurred from 2014 to 2016. There are evidences to support that supply will be back. Since last summer, over 500,000 barrels per day has been added by the United States while the activities of the shale drillers are on the increase. According to the International Energy Agency, the shale industry achieved 30% cost reduction in 2015 while in 2016, a 22% cost reduction was achieved. This led to a rebound as the average shale became more profitable than it was before the downturn.

Furthermore, the IEA is of the opinion that supply shortage could not be overcome by 2020 even if there is a revival of United States shale at lower prices since new projects pipeline is too small.

In the meantime, there will be continuous demand which will overtake supply. According to IEA’s projection, by 2020, global demand is expected to reach 104 million barrels per day. However, OPEC is expected to increase from 32.2 barrels per day last year to 35.8 barrels per day this year.

The largest source of demand growth is India. This is a mantle which was once held by China.

More over, unlike analysts, the IEA believe that electric vehicles should have marginal influence on demand as it may only slow down consumption growth rather than reversing it. Besides, there will be growth in oil demand across sectors which are unrelated to passenger vehicles like aviation, marine transit and freight. According to IEA, “For these reasons, the climax for oil demand remains few years ahead.”

As we have seen demand rising with a new supply shortage, can the United States shale which is experiencing falling oil prices and rise at $50 barrels per day meet up supplies? The IEA opined significant growth for the United States shale, with a rise through 1.4 mb/d in 2022 if the price of oil rises to $60 per barrel. Also, $80 per barrel rise in price could record a growth of 3mb/d.

With the above figures, there is expectation in demand rising by 7.2 mb/d within the time frame, however, this will strain OPEC‘s supplies. Hence, a warning issued by IEA states that oil production capacity demands more investment in order to prevent a sharp price in oil prices by 2020.

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