A warning to consumers has been sent out by the International Energy Agency stating that the current cheap oil prices are not set to last. The agency has said that consumers should not be lulled into a false sense of security by the record low oil prices and believes that a spike in the price of oil could come as soon as 2021.
The IEA (International Energy Agency) has said that it believes prices will start to recover in 2017. However, they go on to say that this recovery will be followed by a surge in prices brought about by the lack of investment from producers that are under pressure from the current dip.
January of this year saw Brent crude drop to just $28.88 per barrel; the price represented a 13-year low. Since then it has crept back up to around $34.62 (an increase of 4.9%, however it still remains far below the $115 high that it reached in June 2014.
The executive director of the International Energy Agency, Fatih Birol, said:
“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future.”
The international policy think tank has predicted that global oil supply will increase by 4.1 million barrels of oil per day between 2015 and 2021. This is well below the 11 million barrels per day increases that were seen between 2009 and 2015. It went on to say that that the level of investment in exploration and production will drop by 17% this year after it went down by around 24% in 2015.
The agency continued:
“Only in 2017 will we finally see oil supply and demand aligned but the enormous stocks being accumulated will act as a dampener on the pace of recovery in oil prices when the market, having balanced, then starts to draw down those stocks.”
There has been a surplus of oil in the global markets ever since the explosion of shale energy production in the United States. This led to the Opec nations, headed by Saudi Arabia, to keep oil output at the same level in order to drive down the prices in an attempt to put pressure on their US competition. This was then exacerbated by the slowdown of economic growth in China, which led to a drop in demand for oil.
However, the IEA said on Monday that it expected the rate of production of US shale to fall in both this year and the next. It is thought that this may reduce the current glut in global oil supplies. The agency is now predicting that US shale production will fall by around 600,000 barrels per day for the remainder of this year and it will continue to drop by around 200,000 barrels per day in 2017.
It was also revealed last week that the number of drilling rigs currently in use in the United States has dropped to its lowest level since the end of 2009. Monday also saw global stock markets jump higher- compounding the gains made last week. These two factors combined seem to have provided commodity markets with some long-sought optimism.
A senior energy economist at ABN Amro, Hans van Cleef, said that “positive sentiments on the stock market and the impact of the lower U.S. rig count gives some support to oil prices”.
Data released last week from the InterContinental Exchange shows that more and more speculators are beginning to put their money on an increase in Brent crude prices. However, in spite of the bounce seen on Monday, many analysts feel that the situation surrounding the markets is still perilously fragile- in particular due to slowing demand.
Analysts from Morgan Stanley recently said:
“The sharp deceleration in demand growth in recent months (especially gasoline) is a key feature of our more bearish view and expectations for a longer rebalancing period.”
“China demand looks particularly challenged with several negative trends of late.”