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Page added on May 1, 2016
IEA chief says oil price bottoming depends on global growth
International Energy Agency (IEA) chief Fatih Birol said on Sunday that oil prices may have bottomed out, providing that the health of the global economy does not pose a concern.
Oil prices hit 2016 highs on Friday with Brent crude LCOc1. reaching $48.50 a barrel on optimism that a global oil glut will ease. That, coupled with a weaker dollar, has helped lift crude futures by more than $20 a barrel since prices plumbed 12-year lows below $30 in the first quarter.
A decline in non-OPEC production amounting to more than 700,000 barrels per day this year, and production outages such as in Nigeria and Kuwait, have driven the rally, Birol told Reuters on the sidelines of the Group of Seven energy ministers’ meeting in Kitakyushu, southwestern Japan.
Asked if oil prices had bottomed out, he said: “It may well be the case, but it will depend on how the global economy looks like. In a normal economic environment, we will see the price direction is rather upwards than downwards.”
“We believe under normal conditions towards the end of this year, second half of this year but latest 2017, markets will rebalance.”
Birol said he hopes to see a rebound in upstream oil investments next year, following a 40 percent curb in investments over two years. Non-OPEC output is set to fall by more than 700,000 barrels per day this year, the biggest decline in around 20 years, he said.
“What we would like to see is, after a big decline in 2015 and 2016, there will be a rebound in investments (in 2017), and bringing (investments) to the level of $600 billion once again,” he said.
Birol said a third year of decline in investments would be problematic for oil markets as it could cause oil price spikes and increase volatility, which would not be good for consumers.
With global oil demand seen growing by 1.2 million bpd this year, the draw in global oil stockpiles will start soon, which will help push up oil prices, he said.
“I think the trend is that there’s a decline of stocks worldwide and the stock building rate is slowing down considerably, and we expect towards the end of this year stock draw will start to kick in,” he said.
Birol said that despite the recent rally in oil prices, it will take a while to change the direction of falling U.S. oil production.
“It will depend on how high the price recovery will go and how long the level of prices will stay,” he said.
“Our analysis shows we need $60-$65 of oil prices in order to reverse the trends in shale oil and this would require also some time for shale oil to come back because there’s a lot of work to be done. We think up to one year is needed in order for shale oil production to change the trends.”
7 Comments on "IEA chief says oil price bottoming depends on global growth"
Davy on Sun, 1st May 2016 5:45 am
“We believe under normal conditions towards the end of this year, second half of this year but latest 2017, markets will rebalance.”
Have we not heard this like a broken record in the past?
“In a normal economic environment, we will see the price direction is rather upwards than downwards.”
Is that something even worth saying? We are so far from normal as to classify this as the “new” “not normal”.
Why not talk about the uncertainty in the global economy. Why not talk about demand destruction in the global economy from destabilizing debt relationships and currencies? We have immense economic instabilities that are likely not going to allow oil a healthy price range. The price of oil is likely to continue to bounce around within an unhealthy range for both the economy and oil producers. The reason for this is simple the economy is not healthy across most sectors. How is oil going to become healthy for producers and consumers in a macro unhealthy environment? Sure prices may rebound but for how long and how much.
Here is the latest from Bloomberg on the subject. They are little more sanguine on the subject of price recovery at least in the near term:
“Oil Market Deja Vu Triggers Predictions of a Return to $30”
http://www.bloomberg.com/news/articles/2016-04-29/oil-market-deja-vu-triggers-predictions-of-a-return-to-30
“There’s a sense of deja vu at Commerzbank AG, BNP Paribas SA and UBS Group AG, who say crude’s gain of about 70 percent from a 12-year low in January resembles the recovery that took hold this time last year — only to sputter out by May as the supply glut endured. Prices will sink back towards $30 a barrel in the coming weeks, BNP and UBS warn.”
“There are dangerous parallels to 2015,” said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. “The market already appears overheated and a correction is overdue.”
shortonoil on Sun, 1st May 2016 7:44 am
“Asked if oil prices had bottomed out, he said: “It may well be the case, but it will depend on how the global economy looks like. In a normal economic environment, we will see the price direction is rather upwards than downwards.”
One would assume that an economist would understand the concept of leverage; but apparently they don’t. The leverage now being applied to oil prices is down, not up. That is because the efficiency with which oil is converted into the goods and services needed to produce oil is only about 20.5%. It requires almost 5 BTU from the well head to put 1 back into that well head. Not surprisingly, that is almost exactly the efficiency at which an internal combustion engine operates:
http://www.thehillsgroup.org/depletion2_019.htm
That means that when the energy to produce oil and its products goes up 1% the energy delivered to the end consumer goes down by 5%. The general economy slows by an amount that was equal to the output that was generated by that 5 BTU. Demand falls with a slowing economy. Wells get deeper, water cut increases and the energy to produce oil and its products is constantly increasing.
The industry fought this Red Queen scenario for 150 years by increasing production fast enough to compensate for its increasing production energy. Between 1960 and 2005 it increased production by an average of 5.46% per year. Since then that production growth rate has fallen to 0.43% per year. Their production growth rate is no longer sufficient to compensate for their increasing production energy. Demand can no longer increase fast enough to absorb the additional tiny fraction of increased production; inventories rise and the price goes down:
http://www.thehillsgroup.org/depletion2_022.htm
The industry was able to keep production growing by 5.46% per year because in years prior it had many yet to be discovered huge rich fields to tap into. Those fields are gone, and the average field to come on online today is less than a 10th of the size of those discovered a few decades ago. The Red Queen is rapidly losing her lead, and the industry can no longer make enough money to replace the reserve that it is extracting.
A couple of years ago oil was selling for almost $100/ barrel, it is now down to $43. We know that they are not making money because if production costs are only $43/ barrel producers would have to have been making a 57% profit margin on their gross sales when prices were $100. They didn’t! The best that the industry can now do is pump what remains in their existing fields, not reinvest in production that can not make money, and shut their doors when their wells run dry!
Economists will continue to fantasize over increasing capital expenditures which the industry can no longer afford; they will continue to dream of increasing price that the economy can longer bare. They will avoid the subject of leverage; its what they don’t want to hear!
http://www.thehillsgroup.org/
geopressure on Sun, 1st May 2016 11:50 am
“Oil prices ‘MAY’ have bottomed out”
What a JOKE… & people read this crap use it to help formulate their opinions…
Boat on Sun, 1st May 2016 3:35 pm
The numbers don’t add up. The glut should go well into 2017. Then there the DUCTs analysts say could add 500,000 to the market. It doesn’t take a year to frack a well.
Brent on Sun, 1st May 2016 6:07 pm
Boat where is the money going to come from to frac more wells? Last time I checked America was broke.
Harquebus on Mon, 2nd May 2016 5:52 am
The global economy has already shown that it can not survive high oil prices and now, the oil industry is showing it can not survive without them. Global debt, the bond that links the two, can only stretch so far. That bond is going to break and it will not end well.
“Banks are trying to unload loans once thought to be the safest form of energy credit.
Debt backed by oil and gas reserves are being offered at discounts as increased scrutiny by regulators and investors has forced lenders to set aside more cash to cover losses”
http://www.bloomberg.com/news/articles/2016-04-25/wary-energy-bankers-trying-to-sell-loans-backed-by-oil-reserves
onlooker on Mon, 2nd May 2016 6:09 am
Debt has artificially inflated the price of everything while affecting adversely the balance sheet of all entities from the biggest ie. countries to the smallest ie. individuals/families.