Charles Ellinas Low oil & gas prices are here to stay

Low oil & gas prices are here to stay

In its just released annual outlook, the International Energy Agency (IEA) said the oil market will remain oversupplied until the end of the decade as the push for cleaner fuels and greater efficiency offsets the effect of lower prices. The IEA expects oil demand to rise on average by less than 1% a year between now and 2020, slower than necessary to quickly absorb an oil glut that has driven prices to multiyear lows.

One of the reasons is that China is now moving away from dirtier fuels to less energy-intensive growth as it heads towards a more consumer-led economy. Fatih Birol, executive director of the IEA, said: “Demand is not as strong as we have seen in the past as a result of efficiency and climate policies globally”, saying also that the growth in renewables will further restrict demand for oil. The IEA does not expect crude oil to reach $80 a barrel until 2020 and after that oil demand growth is expected to grind almost to a halt, increasing just 5% over the next 20 years.

The IEA said a prolonged period of lower oil prices could not be ruled out. In this “low oil price” scenario, the agency said prices would stay close to $50 a barrel until the end of the decade and would not rise to $85 until 2040.

The collapse in Brent crude — from $115 a barrel in June 2014 to below $50 — has battered the budgets of producer countries and forced the world’s biggest oil companies to slash investment.

The IEA expects the Paris climate talks in December, to be a further catalyst in the move towards a low carbon and energy efficient future.

After years of oil above $100 a barrel, the “lower for longer” mantra has become part of the industry lexicon, promoted by traders, bankers and even the IEA itself as global inventories swell and storage fills up. The global oil market remains oversupplied by at least 1m barrels a day.

Since November, production outside Opec from countries such as the US has taken a hit. But it has been far more resilient than expected. Meanwhile, production from Opec, led by Saudi Arabia and Iraq, has increased, helping to keep prices low. And we still have additional Iranian oil to come into the market from next year onwards.

Saudi officials warned this week that investment cuts and oil prices at about $50 for a prolonged time would have a “substantial and long-lasting” impact on future oil supplies and could lead to a price spike. The IEA also made this case in an alternative “scenario”.

But forecasting long-term oil prices is notoriously difficult. Just two years ago, the IEA had said that although the rise of US shale oil would “shake” the energy world, a period of oversupply did not await.

Fitch also expects Brent crude oil to average $55 a barrel in 2016 and $65 a barrel in 2017, with a long-term price deck only at $75 a barrel. Similarly, the IMF is expecting the oil price to persist at the level where it is now for a number of years. Earlier in the week in the futures market Brent crude for delivery in December 2021 was trading at only $65/b.

Wood McKenzie and Societe Generale say that similar arguments apply to gas prices remaining low, through oil-price linkage and a glut in the global supply of LNG.

The cycle of low oil prices may carry on until 2020, and probably beyond, with oil in the range $60-$80/b and gas $6-$7 per mmBTU. This makes financing new projects that much more difficult. Gas export projects, including in the East Med, will be commercially viable only if they can work within these prices.

(This is based partly on a report in the Financial Times)