U.S. crude oil production dropped…
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Since last summer, energy executives have been warning that the price of oil will remain “lower for longer.” That raises two questions, however: How much lower and how much longer?
Bob Dudley, the CEO of BP Plc., who may have been the first to apply that mantra to oil’s crash, now 19 months old, also may have answered the first question. He was among several oil moguls attending the annual World Economic Forum in Davos, Switzerland, who had little, if anything, positive to say about the outlook of their industry for the coming year.
“There is excess supply out there,” Dudley said. “This reminds me of 1986.” He was referring to one of the worst crises the oil industry has weathered, when prices fell below $10 per barrel.
Since June 2014, when the average global price of a barrel of oil exceeded $110, the price has plummeted by three-quarters, and has lost fully 25 percent of its value in the three short weeks since the New Year. The world’s benchmark crudes are now fetching less than $30 per barrel.
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And this downward pressure on prices will continue for the foreseeable future, Dudley said, though he expects a rebound eventually. “Prices will remain low for longer,” Dudley said, “but not forever.”
The reasons for the depressed prices aren’t news, but bear repeating: OPEC is producing at peak levels in an effort to keep prices low and starve out competitors. China’s once fire-breathing economy is slowing down, dampening its demand for oil. And, thanks to a nuclear deal with the West, Iran will rejoin the world oil market, soon cranking out an additional 500,000 barrels of oil per day.
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The U.S. Energy Information Administration (EIA) reported Tuesday that it expects Iran’s annual average production of crude to rise from 2.8 million barrels per day in 2015 to 3.1 million barrels per day in the coming year, or about 10 percent of OPEC’s total production. The EIA report forecast Iranian output to reach about 3.6 million barrels of oil per day in 2017.
A group of oil executives and representatives of oil-producing countries met privately at the Davos forum to discuss these challenges, and an anonymous participant later told Bloomberg that lower capital spending caused by low prices will probably help restore at least some balance between the supply of oil and the demand for it. But that, the source said, isn’t expected before 2017.
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The oil industry leaders attending the Davos meeting aren’t the only ones bearish about their industry. The Paris-based International Energy Agency, which advises 29 countries on energy policy, issued a report on Tuesday warning that “unless something changes, the oil market could drown in oversupply.”
“It is the third year in a row we have more supply than demand,” Fatih Birol, executive director of the International Energy Agency, told Bloomberg Television in Davos. “Prices will be still under pressure. I don’t see any reason why we have a surprise increase in the price in 2016.”
So all eyes appear to be on 2017 as the year of oil’s turnaround. But Yousef al Benyan, the CEO of Saudi Basic Industries Corp., or Sabic, a leading petrochemical group, says that won’t happen until the second half of the year, when he expects new growth in China’s economy.
“There is a lot of pressure from the supply side” preventing a recovery until the third quarter of 2017, al-Benyan said. “The second half of 2017 is going to be the time for a rebound.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com